SGV & Co.

May 27, 2009 BIR RULING [NSNP-(S30F-002) 354-09] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Luis Jose P. Ferrer Partner Gentlemen : This refers to your letter dated April 14, 2009 requesting on behalf of your client, Societe Internationale De Telecommunications Aeronautiques (SITA SC), for confirmation of your opinion that the Philippine Branch Office of SITA SC (SITA-Philippine Branch), a non-stock, non-profit business league, is exempt from income tax and consequently from withholding tax pursuant to Section 30 (F) of the Tax Code of 1997, as amended, in relation to Section 31 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations. It is represented that SITA SC translated as "International Society of Aeronautical Telecommunications" is a limited liability non-profit cooperative incorporated under the laws of Belgium; that SITA SC was founded sometime in 1949 for the purpose of providing world-wide aeronautical data telecommunication services for the benefit of its members; that it was set up as a result of the widespread recognition that, for air safety reasons, a better system of international aeronautical data network telecommunications was essential; that the Aeronautical Fixed Telecommunications Network (ATFN) operated by the National Civil Aviation Authorities was unable to handle growing traffic volumes; that hence, the International Civil Aviation Organization (ICAO) mandated the airline community to set up and operate their own data communication facilities; that the founding airlines pooled their data network facilities in 1949 to set up SITA SC under the legal form of Belgian cooperative company; that any air transport or air transport-related company that wishes to make use of the facilities and services offered by SITA SC worldwide may become a member provided that it acquires one SITA share and it pays a guarantee deposit; that under Article 3 of SITA SC's Articles of Association, its objectives are: DaCTcA 1. to foster all telecommunication and information processing matters directly or indirectly connected with the transmission and processing of all categories of information required in the operation of the air transport industry and to study the problems relating to them with the aim of promoting in all countries safe and regular air transport; 2. to develop, acquire, use and operate in all countries telecommunications and information processing means, and to provide efficient telecommunications and information transmission services; 3. to cooperate with the International Telecommunication Union, the International Civil Aviation Organization, other governmental, international and national bodies, the International Air Transport Association and other airline organizations, in all matters having a bearing on telecommunications and data processing and transmission between air transport enterprises; 4. to enter into agreements, joint ventures or other contractual arrangements to provide telecommunications and information processing services to all categories of users with a view to improving the economic performance of the Society and achieving economies of scale for the benefit of members; and 5. to undertake anything which has a bearing directly or indirectly in whole or in part on the Society's object as determined heretofore, or which would be liable to facilitate or aid its realization. that furthermore, as a limited liability non-profit cooperative, SITA SC's non-profit status is echoed by Article 61 of SITA SC's Articles of Association which provides: "NON PROFIT BASIS ALLOCATION OF FUNDS ARTICLE 61 The Society shall provide services to members on a not for profit basis. Members' participation in the costs of the Society's services shall be made under the terms and conditions set out in the Financial Manual. Each year any over recovery shall be repaid to members and any under recovery shall be called from members in proportion to their contribution to the Society's services. Should a surplus on the balances sheet nevertheless arise after deduction of all amounts due, including general expenses, necessary depreciations and reimbursement of over recoveries to members, a minimum of five percent per annum will be allocated to the formation of a reserve fund. When this fund has reached one-tenth of the capital of the Society, this allotment will cease to be obligatory. The General Assembly will decide on the use of the surplus which may be allocated to an extraordinary reserve fund, an emergency fund, a fund for amortization, or a balance carried forward." that SITA SC's Member's Financial Manual provides: TcSICH "2.1.1. Shared Network Services Cost Incurred The network costs relate to the costs incurred by SITA to provide network services to its members. Global cost recovery principle The recovery of the costs associated with the network take place in two steps. These are outlined below: 1. A monthly debit: this takes into consideration the network activity of the member and applicable pricing terms and conditions; 2. An annual adjustment: in order to respect the cooperative status of SITA and the fact that it operates on a not-for-profit basis, any resulting year-end surplus (over-recovery) is redistributed to members in proportion to their respective contributions to all SITA SC services during the year. In case of under-recovery, a debit is calculated on the same apportionment principles and made to members. These adjustments are shown in SITA invoices after the approval of SITA annual accounts by the Annual General Assembly." that SITA SC's "non-profit status" is recognized in other jurisdiction; that this is evidenced by the fact that a certification was issued to SITA SC by its Statutory Auditor on its "non-profit status"; that currently, SITA SC serves more than 700 air transport industry members; that it is present in more than 200 countries and territories; that there are hundreds of thousands of terminals in airline offices and agencies worldwide, which are directly connected via SITA SC's telecommunication network; that in addition, more than one million computer screens of the airline companies are linked to the SITA SC network through many hundreds of computer systems; that on February 19, 1959, SITA SC was issued a license to do business in the Philippines through SITA-Philippine Branch, by the Securities and Exchange Commission (SEC) specifically to engage in the study, creation and operation of telecommunication facilities for the special use of member airline companies; that SITA-Philippine Branch was registered with the BIR Revenue Region No. 7 on May 28, 1968; that on October 16, 2000, the SEC issued Amended SEC License No. F-327 reflecting the change in SITA-Philippine Branch's purpose to "the study, creation and operation of telecommunication facilities for the special needs of member companies in the air transport industry"; and that the expenditures of SITA-Philippine Branch are reimbursed by member companies in proportion to their use of the entity's facilities. In reply thereto, please be informed that Section 30 (F) of the Tax Code of 1997 provides that "SEC. 30. Exemptions from Tax on Corporations. The following organizations shall not be taxed under this Title in respect to income received by them as such: xxx xxx xxx (F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; xxx xxx xxx" Corollarily, Section 31 of Revenue Regulations No. 2 provides: "Section 31. Business Leagues. A business league is an association of persons having some common business interest, which limits its activities to work for such common interest and does not engage in a regular business of a kind ordinarily carried on for profit. Its work need not be similar to that of a chamber of commerce or board of trade. If it engages in a regular business of a kind ordinarily carried on for profit, the fact that the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not ground for exemption. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not exempt since its members have no common business interest, even though all of its income is devoted to the purpose stated. A clearing house association, not organized for profit, no part of the net income for which inures to any private shareholder or individual, is exempt provided its activities are limited to the exchange of checks, and similar work for the common benefit of its members. An association of persons who are engaged in the transportation business, whether by land or water, which is designed to promote legitimate objects of such business, and all of the income of which is derived from membership dues and is expended for office expenses is exempt from tax." Prescinding from the above-cited provisions, to be considered as a tax-exempt business league it must possesses the following characteristics: ISHaCD 1. It must be an association of persons having a common business interest; 2. The purpose of which is to promote or work for that common business interest; 3. It is not organized for profit; and 4. It does not engage (other than incidentally) in a business ordinarily conducted for profit. In applying the above-cited characteristics to the instant case, SITA SC's Articles of Association would reveal that SITA SC is an association of companies, groups and organizations operating aircrafts for the transport of passengers, mails or cargo or whose primary businesses are related to the air transport industry. Its purposes would establish that it was organized primarily for the purpose of promoting the common interests of its members, i.e., the safety and efficiency of the air transport industry. On the other hand, SITA-Philippine Branch is not engaged in any business activity for profit and it operates exclusively for the benefit of its members. While SITA-Philippine Branch operates data communication facilities for the use of its members, it does not profit from said activity. The operation of the data communication facilities is incidental to the main purpose of SITA-Philippine Branch, which is to promote the common interest of its members, i.e., to ensure air safety through better management of air traffic volumes. The fact that SITA does not profit from the conduct of its activity is supported by the fact that the amount it receives from its members is limited to the member's share in the operating expenses incurred by SITA-Philippine Branch in carrying out the common interest of the members. In other words, the said amount is but a cost reimbursement of the expenses incurred by SITA-Philippine Branch on behalf of a member. Similarly situated is BIR Ruling No. DA337-05 dated August 1, 2005, where this Office ruled that ". . . TMAP is a non-stock, non-profit corporation organized for the exclusive benefit of its members . . . is exempt from income tax under Section 30 (C) of the Tax Code of 1997." IN VIEW OF THE FOREGOING, this Office holds that SITA-Philippine Branch is a non-stock, non-profit business league exempt from income tax and consequently from withholding tax pursuant to Section 30 (F) of the Tax Code of 1997, in relation to Section 31 of Revenue Regulations No. 2. aAHISE 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. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service