Liability for Income Tax, VAT on Sale or Exchange of Services, and Percentage Tax

September 9, 1999 BIR RULING NO. 140-99 27 (A); 108; R.A. 4147-000-00-140-99 Filipinas Orient Airways 57 Tamarind Road South Forbes Park, Makati City Metro Manila Attention: Ms . Rosa O . Caram President & Chairperson Gentlemen : This refers to your letter dated July 22, 1999 requesting for ruling regarding your liability for income tax, VAT on sale or exchange of services, and percentage tax. It appears that you are a grantee of a legislative franchise under Republic Act No. 4147 effective June 20, 1964 to establish and maintain air transport service in the Philippines and between the Philippines and other countries; and that under Section 12 of your franchise, Filipinas Orient Airways "shall pay to the National Government during the life of its franchise a tax of two percent of the gross revenue or gross earnings derived by the grantee from its operation under this franchise. Such tax shall be payable quarterly and shall be in lieu of all taxes of any kind, nature or description, levied, established or collected by any municipal, provincial or national authority: Provided, That if, after the audit of the accounts of the grantee by the Commissioner of Internal Revenue, a deficiency tax is shown to be due, the deficiency tax shall be payable within ten days from the receipt of the assessment. The grantee shall pay the tax on its real property in conformity with existing law." LibLex In reply thereto, please be informed that Executive Order No. 72, s. of 1986, pertinent portion of which provides as follows: "SEC. 2. Any provision of general or special law to the contrary notwithstanding, all grantees of franchises shall be subject to income tax levied under Title II of the National Internal Revenue Code, as amended. "SEC. 3. . . . the pertinent provisions of the charters of franchise grantees, and all other laws, orders, issuances, rules and regulations or parts thereof, inconsistent with this Executive Order are hereby repealed or modified accordingly." effectively amended the "payment of franchise tax of two percent (2%) in lieu of all taxes" provision of Republic Act No. 4147 (Filipinas Orient Airways Franchise) thereby subjecting Filipinas Orient Airways to the corporate income tax imposed under then Section 24(a) of the Tax Code of 1986, [now Section 27(A), Tax Code of 1997] starting February 10, 1987, the date of effectivity of Executive Order No. 72. Similarly, said R.A. 4147 was further amended by then Section 102 of the NIRC, as amended by R.A. No. 7716, otherwise known as the Expanded Vat Law (EVAT) [now Section 108 of the NIRC, as renumbered by R.A. 8424], in respect to its domestic carriage of goods, which provides that "SEC. 108. 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. cdll "The phrase "sale or exchange of services" means the performance of all kinds services in the Philippines for others for a fee, remuneration or consideration, including . . . transportation contractors on their transport of goods or cargoes for hire and other domestic carriers by land , air and water relative to their transport of goods or cargoes , services of franchise grantees of telephone and telegraph , radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code ; . . ." (Emphasis supplied) The franchise grantees referred to under the said Section 119 of the NIRC only refers to the legislative franchise grantees pertaining to "radio and/or television broadcasting, electric, gas and water utilities". Since your franchise is not embraced by Section 119 of the Code, then your domestic operations, to the extent of its carriage of goods and cargoes, became subject to the 10% VAT pursuant to the above-quoted Section 108 of the 1997 Tax Code. Moreover, since your domestic operations in respect to carriage of passengers was not amended by R.A. 7716, your revenues derived therefrom shall remain subject to the aforesaid two percent (2%) franchise tax. Finally, since only your domestic operations had been amended by R.A. 7716, your revenue from your international operations shall remain subject to the said franchise tax. llcd Please be guided accordingly. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue