Comments and Recommendations on Article XIII of the RP-Canada Air Services Agreement on "Exemptions from Customs Duties and Other Charges"

June 16, 1995 BIR RULING [UN-223-95] MEMORANDUM FOR : Dr. Jaime S. Bautista Assistant Secretary Department of Foreign Affairs FROM : Commissioner Liwayway Vinzons-Chato Bureau of Internal Revenue RE : Comments and Recommendations on Article XIII of the RP-Canada Air Services Agreement on "Exemptions from Customs Duties and Other Charges" In connection with the negotiations on the RP-Canada Air Services Agreement, the Honorable Assistant Secretary Dr. Jaime S. Bautista, is seeking the comments and recommendations of this Office on the following provisions of the aforesaid Agreement, particularly on "Exemptions from Customs Duties and Other Charges", viz: liblex "ARTICLE XIII "(Customs Duties and Other Charges) "(1) Each Contracting Party shall, to the fullest extent possible under its national law and on a basis of reciprocity, exempt the designated airline or airlines of the other Contracting Party from import restrictions, customs duties, excise taxes, inspection fees and other national duties and charges on aircraft, fuel, lubricating oils, consumable technical supplies, spare parts including engines, regular aircraft equipment, aircraft stores (including liquor, tobacco and other products destined for sale to passengers in limited quantities during the flight) and other items intended for use or used solely in connection with the operation or servicing of aircraft of that airline as well as printed ticket stock, airway bills, any printed materials which bears the insignia of the company printed thereon and usual publicity material distributed without charge by that airline. "(2) The exemptions granted by this Article shall apply to the items referred to in paragraph 1 of this Article. "(a) introduced into the territory of one Contracting Party by or on behalf of the designated airline of the other Contracting Party; "(b) retained on board aircraft of a designated airline of one Contracting Party upon arriving in or leaving the territory of the other Contracting Party; and "(c) taken on board aircraft of a designated airline of one Contracting Party in the territory of the other Contracting Party. whether or not such items are used or consumed wholly within the territory of the Contracting Party granting the exemption, provided such items are not alienated in the territory of the said Contracting Party. "(3) The regular airborne equipment, as well as the materials and supplies normally retained on board the aircraft of the designated airline of either Contracting Party, may be unloaded in the territory of the other Contracting Party only with the approval of the Customs authorities of that territory. In such case, they may be placed under the supervision of the said authorities up to such time as they are re-exported or otherwise disposed of in accordance with Customs regulations. "(4) Baggage and cargo in direct transit across the territory of either Contracting Party shall be exempt from customs duties and other similar charges." COMMENTS: In general, an exemption from taxation is a personal privilege which may be enjoyed solely by the grantee. That is why, tax exemption is never presumed. 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 exempted 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 the Philippines, the sources of tax exemptions are those provided for under the Constitution, tax treaties, statutes and other special laws. Those provided for in the Constitution are self-executing and need no legislation to enforce them. Those found in the tax treaties are generally granted on grounds of reciprocity and to lessen the rigors of international double or multiple taxation. We will delve on these two (2) sources of tax exemptions. It is very apparent under the existing RP-Canada Tax Treaty, the only source of tax exemption that we may rely on this instant case, that persons who are residents of one or both of the Contracting States may apply for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income only, viz: "ARTICLE II "TAXES COVERED "(1) This Convention shall apply to taxes on income imposed on behalf of each Contracting State, irrespective of the manner in which they are levied. "(2) There shall be regarded as taxes on income all taxes imposed on total income or on elements of income, including taxes on gains from the alienation of movable or immovable property and taxes on the total amounts of wages or salaries paid by enterprises. "(3) The existing taxes to which the Convention shall apply are in particular: "(a) in the case of Canada: the income taxes imposed by the Government of Canada, (hereinafter referred to as "Canadian tax"); "(b) in the case of the Philippines: the income taxes imposed by the Government of the Republic of the Philippines, (hereinafter referred to as "Philippine tax"). "(4) The Convention shall apply also to any identical or substantially similar taxes on income which are imposed after the date of signature of this Convention in addition to, or in place of, the existing taxes. The Contracting States shall notify each other of changes which have been made to their respective taxation laws." And following the general rule under the statutory construction that "whatever is excluded should not be included," the suggested provisions of Article XIII on the proposed RP-Canada Air Service Agreement are not generally possible. For us to allow the grant of tax exemptions, other than income tax exemption as provided for under the said RP-Canada Tax Treaty, would be an act of "administrative legislation", which the law does not permit, because only the Legislature, with the concurrence of a majority of all the members of the Congress, can grant further tax exemption. It is noted, however, that the aforesaid suggested provisions of Article XIII on the proposed RP-Canada Air Service Agreement exempting the Contracting Parties based on reciprocity from customs duties and other charges are feasible/reasonable since both participating countries will be benefited. It is therefore the recommendation/suggestion of this Office that the aforesaid proposed provisions of the said Agreement be ratified by Congress in view of the provision in the Philippine Constitution that "No law granting tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress." [Article VI, Sec. 28(4), 1987 Philippine Constitution]. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue