PAL Proposal to Exempt from Income Tax Filipino Airline Pilots Who Fly Internationally

November 18, 2010 DOF OPINION Hon. Jose Amor Amorado Senior Deputy Executive Secretary Office of the President Malacaang Dear Senior Deputy Executive Secretary Amorado : This has reference to your letter dated November 09, 2010 which sought the comments of the Department of Finance on the proposal of Philippine Airlines to exempt from income tax Filipino airline pilots who fly internationally. PAL premised its proposal on its Filipino pilots who fly internationally being similarly situated with our Overseas Filipino Workers/seafarers (OFW/S) because they are "almost always abroad." Thus, their incomes should also be tax-exempt. PAL claims that because 75% of its operating revenues are derived from its international operations, it is "truly and essentially an air carrier engaged in international trade" and argues further that "the moment a PAL aircraft bound for abroad takes off from the NAIA, the pilot manning the flight technically renders service for international trade". PAL's proposal, stemming from the recurring problem of outward migration of Filipino pilots for a much higher compensation, is viewed by PAL as an "effective incentive" to its pilots to encourage them to render service to the country than to foreigners. aESIHT DOF Position. We deem, however, that the proposal is untenable for the following reasons: 1. The proposal has no legal basis. 1.1. It is a basic principle in taxation that a tax exemption must be strictly construed against the taxpayer and "he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications." 1 1.2. Section 23 (C) of the NIRC, 2 which is being cited as basis for the PAL proposal and which contains the income tax exemption of OFW/S on incomes earned abroad, cannot extend to other subjects like Filipino pilots by mere implication because said Section clearly applies only to OFWs. 1.3. The BIR cannot even amend its Revenue Regulations by recognizing Filipino pilots flying internationally as being "abroad" for more than 183 days and thus, qualifying as OFW/S for purposes of Sec. 23. This would be tantamount to an amendment of the law, and the DOF and BIR have no authority or power to amend the law, in this case, the National Internal Revenue Code. 1.4. It should be clearly emphasized that OFW/S are employed outside the Philippines while these Filipino pilots are employed by PAL, a domestic corporation. When rendering services as part of their employment contracts, their port of origin remains the Philippines and their flights to international destinations are mere extensions of services rendered within the Philippines. 1.5. They are not even required to register with the Philippine Overseas Employment Agency (POEA) because they have never been regarded as OFWs. Making them do so, however, will still not be a sufficient consideration to make them eligible to the income tax exemption being proposed. EITcaD 2. The proposal is iniquitous. 2.1. Even if there is a proposal in Congress to amend the NIRC in order to grant the tax exemption being sought for, such measure would be a violation of the general principles of the Philippines' income taxation. These pilots remain to be resident citizens who should be taxed on income derived from sources within and outside the Philippines. They cannot be categorized as non-resident citizens (like OFWs) who live abroad for more than 183 days and who are taxable only on income derived from sources within the Philippines. 2.2. An income tax exemption would place these Filipino pilots in a special class of taxpayers that enables them to enjoy very preferential tax treatment that disregards the capacity-to-pay principle. Thus, we strongly disagree with the proposal. Our tax system should not be unduly burdened by a tax exemption that, essentially, is an inappropriate solution to the pilot problem of PAL. Thank you for requesting our comments. Very truly yours, (SGD.) CESAR V. PURISIMA Secretary Footnotes 1. Commissioner of Internal Revenue vs. General Foods, G.R. No. 143672, April 24, 2003. 2. "Sec. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: (A) . . .; (B) . . .; (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; (D) . . .; (E) . . .; (F) . . . ."