Whether or Not Cebu Air, Inc. Can Be Considered as a Tax Exempt Establishment for VAT Purposes

September 24, 1997 BIR RULING NO. 101-97 102 (a) 103 (q) 000-00 101-97 MEMORANDUM DATE : July 28, 1997 FOR : Deputy Commissioner ESTELITA C. AGUIRRE FROM : ACIR Sixto S. Esquivias IV Legal Service SUBJECT : Whether or Not Cebu Air, Inc. Can Be Considered as a Tax Exempt Establishment for VAT Purposes This refers to your Memorandum dated July 28, 1997 requesting for a ruling as to whether Cebu Air, Inc. can be considered as a tax-exempt establishment relative to the payment of Value-Added Tax (VAT). FACTS : It appears that Cebu Air, Inc. was granted a legislative franchise under Republic Act No. 7151 to engage in the transport of cargoes and passengers, by air, both domestic and international, with Cebu as its base. Under Section 11 of the said R.A. No. 7151, Cebu Air, Inc. is allowed to benefit from tax privileges enjoyed by competing airlines, viz. : "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 that any competing individual, partnership or corporation receives and enjoys tax privileges and other favorable terms which tend to place the herein grantee at any disadvantage, then such provisions shall be deemed ipso facto part hereof and shall operate equally in favor of the grantee. "The grantee shall, however, be subject to income tax levied under Titles II of the National Internal Revenue Code, as amended, and tax on its real property under existing laws on revenue earned from activities other than air transportation." Cebu Air's major competitor, at this time, is Philippine Airlines (PAL), which has, until recent years, enjoyed a virtual monopoly of the local air transport industry. Consequently, Cebu Air is, under the above-mentioned provisions of RA 7151, invoking the exemptions enjoyed by PAL by virtue of Sec. 13 of Presidential Decree No. 1590, to wit: "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 the following: "(1) . . . "(2) All taxes including compensation 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; "xxx xxx xxx" (Emphasis supplied.) therefore exempt from the payment of taxes due on importations of aircraft, engines, equipment, machinery, spare parts, etc. Furthermore, in the letter to Cebu Air by Executive Secretary Ruben D. Torres dated April 15, 1996, Cebu Air claims that the Honorable Secretary allegedly supposed to have ruled that it is exempt from the payment of VAT on its importation of goods, similar to the privilege extended to PAL by virtue of the ipso facto clause in R.A. 7151. However, with the promulgation of RA 7716 restructuring the VAT system, such exemptions enjoyed by PAL were effectively rescinded in accordance with Sec. 4 of the said Republic Act, which amended Sec. 103(q) of the Tax Code in the following manner: "SEC. 103. Exempt transactions . The following shall be exempt from the value-added tax: xxx xxx xxx "(q) Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66, 529, 972, 1491, and 1590, and non-electric cooperatives under Republic Act No. 6938, or international agreements to which the Philippines is a signatory." Considering that PAL's exemptions have already been withdrawn under the said provision, Cebu Air would no longer have any legal basis to claim similar exemptions on its importation of goods. However, the Bureau issued to Cebu Air several ATRIGs on importations, from January 1, 1996 to April 10, 1997. These ATRIGs reflect, collatilla, that the Bureau is allowing "the conditional release of imported articles under the VAT-exempt status, pending resolution of their tax-exempt status." As such, Cebu Air posted a surety bond in the amount of Twenty Million Pesos (P20,000,000.00) to guarantee the payment of VAT liabilities on these conditionally released importations. It should be noted, however, that it cannot be clearly determined whether the issue of Cebu Air's tax-exempt status has ever been elevated to the Legal Service. The Chief, Regulatory Operations Monitoring Division, has stated that per the verbal representation of Cebu Air, they themselves have yet to request the Bureau for a formal ruling on the issue. In the interim, it was determined that the total value of the importations made by Cebu in 1996 and the first quarter of 1997, and that were conditionally released under the corresponding ATRIGs stands at $10 million, while the estimated VAT on these items has been pegged at P28 million. As such, this total VAT exposure has already exceeded Cebu Air's surety bond by P8 million. In April of this year, Cebu Air filed several additional applications for ATRIGs involving the total amount of approximately $2.8 million. These applications, however, were denied, for lack of legal bases, in consideration of Sec. 103(q) of the NIRC, as amended by RA 7716. Cebu Air, however, is strongly objecting to such denial, and is once more requesting that the subject importations be conditionally released. They are, however, willing to settle their VAT liabilities once the Bureau issues a formal ruling on the question of their tax-exempt status. ISSUES Whether or not Cebu Air, Inc. can be considered as a tax-exempt establishment for VAT purposes (1) On the gross receipts it derives from its transport operations; and (2) On its importation of aircraft, engines, equipment, machinery, spare parts, accessories, and other articles, supplies and materials. OPINION : (1) Whether or not the gross receipts derived by Cebu Air from its domestic transport operations is exempt from VAT . The mere inclusion of the services of all other franchise grantees, EXCEPT radio and/or television broadcasting companies whose annual gross receipts of the preceding year does not exceed P10 Million, and electric, gas and water utilities , among those services which are subject to VAT under Sec. 102(a) of the Tax Code, as amended by RA No. 7716, as further amended by RA No. 8241, contemplates that all services being rendered by any franchise grantee not falling under Sec. 117 of the Tax Code, regardless of any previous exemptions granted to it by any general or special law under its franchise, are now subject to VAT: "Sec. 102. Value-added tax on sale of services and use or lease of properties . "(a) Rate and base of tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. "The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including . . . SERVICES OF franchise grantees of telephone and telegraph, radio and television broadcasting and ALL OTHER FRANCHISE GRANTEES except those under Sec. 117 of this Code ; . . ." (Emphasis supplied) Further, Section 117 of the Tax Code, as amended by R.A. 8241, provides: "Sec. 117. Tax on franchises . Any provision of general or special law to the contrary, notwithstanding, there shall be levied, assessed and collected in respect to all franchises on radio and/or television broadcasting, companies whose annual gross receipts of the preceding year does not exceed Ten Million Pesos (P10,000,000) , subject to Sec. 107(d) of this Code, a tax of three percent (3%) and on electric, gas and water utilities , a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise: Provided, however , That radio and television broadcasting companies referred to in this Section shall have an option to be registered as a value-added taxpayer and pay the tax due thereon: Provided, further , That once the option is exercised, it shall not be revoked. The grantee shall file the return with, and pay the tax due thereon to, the Commissioner of Internal Revenue or his duly authorized representative in accordance with the provisions of Sec. 125 of this Code and the return shall be subject to audit by the Bureau of Internal Revenue, any provision of any existing law to the contrary notwithstanding." PAL and all other domestic common carriers by air, which include Cebu Air, belong to the category of "other franchise grantees" referred to under Sec. 102(a), in relation to Sec. 117, both of the Tax Code, as amended, meaning that they belong to the group of franchise grantees which are not subject to the franchise tax under Sec. 117 of the Tax Code, and therefore liable to VAT under Sec. 102(a) of the same Code. Thus, all services by the said franchise grantees which are previously exempt under their respective Charters are now subject to VAT. In BIR Ruling No. 27-97 dated March 31, 1997, the Commissioner held that due to the inclusion of franchise grantees in Sec. 102(a) of the Tax Code, as amended by R.A. No. 7716, and as further amended by R.A. 8241, " effective January 1, 1996, PT & T (a franchise grantee not falling under Sec . 117 of the Tax Code) shall no longer be subject to the one and one-half percent (1 %) franchise tax on its gross receipts from business covered by the law granting its franchise but to the 10% VAT prescribed under Sec . 102 of the Tax Code, as amended ." Similarly, effective January 1, 1996, Cebu Air, Inc., being a franchise grantee not falling under Sec. 117 of the Tax Code, as amended, shall no longer be subject to the franchise tax on its gross receipts derived from its domestic transport of goods and cargoes covered by the law granting its franchise under RA 7151, but to the 10% VAT prescribed under Sec. 102(a) of the Tax Code, as amended, as implemented by Sec. 4.103-1(B)(q)(4) of RR 7-95, as amended by Sec. 4 of RR 6-97. However, the gross receipts it derives from the transport of its passengers shall be subject to the common carrier's tax equivalent to 3% of its quarterly gross receipts pursuant to Sec. 115 of the Tax Code, as amended. (2) Whether or not Cebu Air's importations of aircraft, engines, equipments, machinery, spare parts, accessories, and other articles, supplies and materials are exempt from VAT. Under Section 99 of the Tax Code, as amended by R.A. 7716, and as last amended by R.A. 8241, VAT is imposed on the following: (1) Sale of goods; (2) Sale of services; (3) Lease of goods or properties; and (4) Importation of goods. "Sec. 99. Persons liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be liable to the value-added tax (VAT) imposed in Secs. 100 to 102 of this Code. ". . ." (Emphasis supplied.) Corollarily, the aforestated "vatable transactions" are the very same transactions construed to be excepted under P.D. No. 1590 as provided for under Sec. 103(q) of the Tax Code, as amended, meaning that they are the very same transactions/services being rendered by PAL to be previously exempt from tax under its franchise, but which are now subject to VAT, such as, but not limited to, the importation of goods. "Sec. 103. Exempt transactions . The following shall be exempt from the value-added tax: xxx xxx xxx "(q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and 1590 . xxx xxx xxx" (Emphasis supplied.) Cebu Air, by virtue of the ipso facto clause under Sec. 11 of RA 7151 in relation to Sec. 13(b)(2) of PD 1590, is allowed to benefit from the tax privileges being enjoyed by PAL, which includes exemption from all taxes due on all its importations of aircraft, engines, equipment, machinery, spare parts, accessories, and other articles, supplies, or materials. However, with the promulgation of RA 7716, as last amended by RA 8241, which restructured and improved the VAT system, such exemptions were rescinded and consequently withdrawn. Thus, Cebu Air's legal basis for claiming similar exemptions on importation of articles as provided for under Sec. 13(b)(2) of PD 1590, in relation to Sec. 11 of RA 7151, is likewise withdrawn. Thus, on page 31 of the consolidated decision rendered by the Supreme Court En Banc in G.R. Nos. 115455, 115525, 115543, 115544, 115754, 115781, 115852, 115873 and 115931 promulgated on October 30, 1995, it was held that "Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those previously granted to PAL , . . ., and many more are likewise TOTALLY WITHDRAWN, in addition to exemptions which are partially withdrawn, in an effort to broaden the base of the tax . "xxx xxx xxx" (Emphases supplied.) It is a fundamental rule that grants of tax exemption are generally revocable. There is a recognized exception though as regards contractual exemptions on the theory that revocation without the consent of the grantee would impair the obligation of contract. However, this is not so in the case of franchises. The Constitution provides that no franchise shall be granted unless subject to the condition that it shall be subject to repeal or amendment. Therefore, any exemption granted under a franchise may be revoked by Congress . In relation to this, Sec. 13 of RA 7151 states, viz: "SEC. 13. Legislative Amendment . This franchise is subject to amendments or repeal by Congress when the common good so requires." It must be borne in mind that Sec. 103(q) of the Tax Code, as amended by RA 7716, as further amended by RA 8241, expressly excepted from the exempt transactions "the transactions which are exempt under PD 1590, from further exemptions, meaning that the then exempt transactions under PD 1590 which are now "vatable" shall now be subject to VAT. However, although Rev. Regs. No. 7-95 interpreted Sec. 103(q) of the Tax Code, as amended by RA 7716, and as further amended by RA 8241, to mean that "only gross receipts being derived by PAL from the services it renders with respect to the transport of goods and cargoes are no longer exempt from tax" as a result of the inclusion thereof into the VAT system under RA 7716, as amended by RA 8241, a stricter interpretation would give us the impression that because of the inclusion, on the other hand, of Sec . 103(q) into the VAT system, even the tax exemptions of PAL on (1) the sale of goods in the plane, if any ; (2) the receipts it derives from the lease of its properties; and (3) the importation of goods ; should all be deleted from the bunch of its exemption privileges because of the sweeping phrase " transactions which are exempt under special laws except those under P . D . 1590 " since the term " transactions " is all encompassing and could mean to include " all vatable transactions " being rendered by PAL in the course of its trade or business. On page 37 of the same decision held En Banc by the Supreme Court in G.R. No. 115455, etc., it was further held that "Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class be taxed at the same rate . The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. To satisfy this requirement, it is enough that the statute or ordinance applies equally to all persons, forms and corporations placed in similar situation. ( City of Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra )" (Emphasis supplied.) It has always been the rule that " exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority primarily because taxes are the lifeblood of the government and their prompt and certain availability is an imperious need ." Thus, to be exempt from the payment of taxes, it is the taxpayer's duty to justify the exemption by words too plain to be mistaken and too categorical to be misinterpreted. In this instant case, with the promulgation of RA 7716 restructuring the VAT system, as amended by RA 8241, further improving the VAT system amending, among others, Sec. 103(q) of the Tax Code, the tax exemptions being enjoyed by PAL which include tax exemptions on its importations of aircraft, equipment, spare parts, etc. were effectively rescinded and withdrawn. Consequently, Cebu Air would no longer have any legal basis to claim similar exemptions on the said importations because it only enjoys such tax exemption by virtue of its ipso facto clause under Sec. 11 of RA 7151 which is already deemed withdrawn because of the withdrawal of the exemptions of PAL provided for under Sec. 13 of PD 1590 by virtue of the inclusion of Sec. 103(q) in the Tax Code, as amended by RA 7716 and as last amended by RA 8241. cd RECOMMENDATIONS : In view of all the foregoing, with the rescission and withdrawal of PAL's (and corollarily Cebu Air's) exemption on importations of aircraft, engines, equipment. machinery, spare parts, accessories, and other articles, supplies, or materials by virtue of Sec. 103(q) of the Tax Code, as amended by RA Nos. 7716 and 8241, and as ably interpreted on pp. 31 and 37 of the consolidated decision of the Supreme Court En Banc in G.R. Nos. 115455, 115525, 115543, 115544, 115754, 115781, 115852, 115873 and 115931 promulgated on October 30, 1995, it is hereby recommended that the importations of the same articles by Cebu Air, Inc. should now be subject to VAT beginning January 1, 1996. This ruling revokes/modifies all other rulings and ATRIGs issued by this Office regarding the importations of aircraft, engines, equipment, machinery, spare parts, accessories, and other articles, supplies or materials made by Cebu Air and all other domestic airline companies beginning January 1, 1996, the latest of which is issued to Cebu Air on June 6, 1997, and that the estimated VAT payable by Cebu Air on the said importations approximately amounting to P28 million as of the First Quarter of 1997 be now assessed and collected. SIXTO S. ESQUIVIAS IV Assistant Commissioner Legal Service APPROVED: LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue