Request for Review of BIR Ruling No. 099-2011 Re: Taxability of Services Provided by Local Suppliers to Delta Air Lines

September 8, 2011 DOF OPINION Follosco Morallos & Herce 25th Floor, 88 Corporate Center, 141 Valero St. corner Sedeo St., Salcedo Village, Makati City Attention: Atty. Rachel P. Follosco Atty. Lovely E. Lim Gentlemen : This pertains to your request for review of Bureau of Internal Revenue ("BIR") Ruling No. 099-2011, which held that the services provided by local suppliers to Delta Air Lines, Inc. ("Delta") for the accommodation/lodging, including the meals, of its pilots and cabin crews during flight layovers in the Philippines are subject to 12% value-added tax (VAT). Thus: "In the instant case, the services provided by the Hotel to its clients engaged in international air transport operations pertain to room accommodations and food and beverage services. As they are rendered within the Hotel's premises, they have no direct connection with the transport of goods or passengers, and as such, they cannot be considered as services directly attributable to the transport of goods and passengers from a Philippine port directly to a foreign port entitled to zero-rating. Such being the case, the sale of the foregoing services by the Hotel is not zero rated, but is appropriately subject to the 12% VAT." Moreover, Section 108 (B) (4) of the Tax Code should be read in accordance with the Destination Principle and Cross Border Doctrine to which the Philippine VAT system adheres. According to the Destination Principle, goods and services are taxed only in the country where these are consumed. In connection with the said principle, the Cross Border Doctrine mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority. 1 This is the reason why under our VAT Law, goods, property or services destined, used or consumed in the Philippines are subject to the 12% VAT whereas those destined, used or consumed abroad are subject to 0% VAT. 2 Here, the use or benefit derived from the subject services (room accommodations and meals) being rendered to the crew of Delta does not cross the Philippine territory. Such services furthermore, cannot be characterized as services directly used in connection with international air operation unlike in the case of general sales agents of international airlines whose services are directly connected with or attributable to the transport of goods or passengers from the Philippines to a foreign port. In view of the foregoing, we hold that the services provided by local VAT-registered suppliers to Delta for the accommodation/lodging of its pilots and cabin crew members during flight layovers in the Philippines are not entitled to 0% VAT but rather, are subject to the 12% VAT. ScHAIT Very truly yours, (SGD.) CESAR V. PURISIMA Secretary Footnotes 1. Atlas Consolidated Mining and Development Corp. v. Commissioner of Internal Revenue , G.R. Nos. 141104 & 148763, June 8, 2007. 2. See BIR Ruling DA-127-06 dated March 16, 2006.