Sale of Maintenance Chemicals to PAL is Subject to 20% Manufacturer's Sales Tax

September 15, 1987 BIR RULING NO. 290-87 162 000-00 290-87 M a d a m : This refers to your letter dated March 26, 1987 requesting clarification on the correct rate of manufacturer's sales tax to be paid by your client on its sale of maintenance chemicals to the Philippine Airlines. In reply, please be informed that the new franchise of PAL (P.D. No. 1590) now carry the following exemption provision which states: "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: i "(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 purchaser either as part of the price or cost thereof or by actual agreement or other arrangement; . . . "(2) All taxes, including compensating taxes, duties, charges, royalties, or fees due on all importation 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; . . . xxx xxx xxx From the foregoing provision of Presidential Decree No. 1590, which embodies PAL's new franchise, payment by PAL of either the corporate income tax computed in accordance with the provisions of the Tax Code, or the 2% franchise tax based on the gross revenue derived from all sources, is in lieu of all other taxes. The taxes covered by the exemption include only the indirect taxes on PAL's respective purchases of aviation gas, fuel and oil. Such being the case, PAL's tax exemption privilege from indirect tax does not cover other articles, such as the manufacturer's sales tax on maintenance chemicals purchased by PAL from your client. adc In view thereof, this Office believes, and so holds, that your client is subject to the manufacturer's sales tax of 20% on maintenance chemicals sold to PAL, in accordance with Section 163(4) of the Tax Code, as amended by Executive Order No. 36. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner