Tax Imposed on the Sales of Goods and Services to PAL

September 13, 1988 BIR RULING NO. 437-88 100 (a) 000-00 437-88 Gentlemen : This refers to your letters dated May 19 and August 26, 1988 requesting reconsideration of the ruling issued by this Office on February 5, 1988 subjecting PAL to the 3% common carrier's tax and likewise to the value-added tax (VAT) on other transactions such as leasing of equipment or vehicles. You also request that a ruling be issued declaring that sales of goods and services to PAL shall be subject to the value-added tax at zero percent. cdta You contented that under Section 13 of Presidential Decree No. 1590 (PAL's franchise), PAL shall pay either the basic corporate income tax on its net taxable income or franchise tax of 2% of its gross revenues, whichever is lower, and the tax paid under either of the said 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. It likewise appears that Executive Secretary Catalino Macaraig, Jr. has rendered an opinion on March 30, 1988 to the effect that E.O. Nos. 72 and 93 have not effectively amended or modified any provision or section of P.D. No. 1590. In reply, please be informed that on the basis of the foregoing, your request for consideration is hereby granted insofar as PAL's liability to the 3% common carrier's tax is concerned. Accordingly, since PAL is subject either to the corporate income tax under Section 24(a) of the Tax Code or to the 2% franchise tax as provided for in the franchise, whichever is lower, which is in lieu of all other taxes, PAL is not subject to the said 3% tax. However, the other transactions of PAL such as leasing of equipment or vehicles are extraneous income which are not necessarily connected with the operation of its franchise. Such income are, therefore, subject to the value-added tax imposed by Section 100(a) of the Tax Code, as amended by Executive Order No. 273. Regarding your request that the sales of goods and services to PAL be subject to zero percent, Sections 8(b)(2) and 8(c)(2) of Revenue Regulations No. 5-87 provide: "Sec. 8. Zero-rating . . . . "(b) Zero-rated sales of goods . The following sales by VAT-registered persons are zero-rated: xxx xxx xxx "(2) Sales to persons or entities whose exemptions are effectively zero-rated under special laws or international agreements to which the Philippines is a signatory. It refers to exemption expressly granted under special laws or treaties which are extended not only to the grantee but also to its supplier of goods." "(c) Zero-rated sales of service . xxx xxx xxx "(2) Services rendered to persons or entities which are effectively zero-rated under special laws or international agreement. In this case, if under the law or agreement, it is not only the entity that is exempt from taxes but also its suppliers, the sales of services to such entity are effectively zero-rated. The example given above with respect to sales of goods to U.S. Military facility and the Asian Development Bank shall also apply to those rendering services." Under the foregoing provisions of Revenue Regulations No. 587, to be zero-rated, the law must grant exemption from taxes not only to PAL but also to its supplier of the goods and services. Clearly, there is no provision of P.D. No. 1590 or any other law which grants exemption from taxes with respect to PAL's purchases of goods and services. In fact, under LOI No. 1483 effective November 1, 1985, PAL's exemption privilege with respect to its purchases of petroleum products for use in its domestic operations was withdrawn. Accordingly, your request that sales of goods and service to PAL be zero-rated cannot be granted for lack of legal basis. Moreover, since under LOI No. 1483 which effectively amended the tax exemption provisions of P.D. No. 1590 (PAL's franchise), PAL's previously granted tax exemption privilege to purchase petroleum products for use in its domestic operations is withdrawn, petroleum products purchased by you for use in your domestic operations are subject to the excise ( ad valorem ) tax imposed by Section 145(b) of the Tax Code, as amended by Executive Order No. 273 payable by the manufacturer or producer thereof. However, said petroleum products, except the lubricating oil and grease, are exempt from value-added tax in accordance with Section 103(d) of the same Code. In other words, said lubricating oil and grease purchased by you are subject to the 10% VAT . cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner