KLM Royal Dutch Airlines

June 20, 2019 ITAD BIR RULING NO. 019-19 Section 28 (A) (a), National Internal Revenue Code of 1997, as amended KLM Royal Dutch Airlines 39th Floor, Yuchengco Tower, RCBC Plaza Ayala Avenue corner Sen. Gil Puyat Avenue 1200 Makati City Attention: AAA __________ Gentlemen : This refers to your letter dated January 11, 2019 requesting confirmation that Koninklijke Luchtvaart Maatschappij N.V. Royal Dutch Airlines (" KLM Airlines ") continues to be exempt from income tax on its Gross Philippine Billings on the basis of reciprocity pursuant to Section 28 (A) (3) (a), National Internal Revenue Code of 1997 (" Tax Code "), as amended. HTcADC As represented, KLM Airlines is an international air carrier organized and existing under the laws of the Netherlands. It was issued a license to establish a branch office in the Philippines by the Securities and Exchange Commission on August 8, 1955. According to Chapter III, Article 19 of the 1969 Corporation Tax Act of the Netherlands, as certified by the Competent Tax Authority, income, profits and gains derived by foreign shipping and air transport companies from the operation of ships or aircraft in international traffic, i.e. , travelling to and from the Netherland harbors or airports, shall not be taxed in the Netherlands, provided that the foreign country does not tax the income, profits and gains derived by shipping and air transport companies that are residents of the Netherlands from their operation of ships or aircraft in international traffic. Thus, the Netherlands does not tax the income, profits and gains derived by shipping and air transport companies of the Republic of the Philippines from their operation of ships or aircraft in international traffic on the basis of reciprocity. Based on the affidavit issued by BBB, __________ of KLM Airlines Branch Office in the Philippines, on January 11, 2019, there is no change in the reciprocity tax law of the Kingdom of the Netherlands granting income tax exemption to foreign shipping and air transport companies deriving income, profits and gains from their operation of ships or aircraft in international traffic. In reply, please be informed that the two Philippine air carriers, namely, Philippine Airlines (" PAL ") and Cebu Pacific Airlines (" Cebu Pacific "), have no flight operations in the Netherlands, particularly Amsterdam, based on these carriers' websites. 1 PAL used to have operations in Amsterdam while Cebu Pacific has not yet conducted operations in the Netherlands. We again quote Section 28 (A) (3) (a) of the Tax Code and Section 4.2 (B) of Revenue Regulations No. 15-2013 2 for emphasis: " SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. xxx xxx xxx (3) International Carrier . An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder: (a) International Air Carrier . 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo, and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document. Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines. Provided, further, Than for a flight which originates from the Philippines, but transshipment of passenger takes place at any part outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. xxx xxx xxx Provided, That international carriers doing business in the Philippines may avail of a preferential rate or exemption from the tax herein imposed on their gross revenue derived from the carriage of persons and their excess baggage on the basis of an applicable tax treaty or international agreement to which the Philippines is a signatory or on the basis of reciprocity such that an international carrier, whose home country grants income tax exemption to Philippine carriers , shall likewise be exempt from the tax imposed under this provision." "4.2) Preferential Income Tax Rate or Exemption of International Carrier with Flights or Voyage Originating from Philippine Ports . Under Section 28(A)(3) of the NIRC, as amended by RA No. 10378, international carriers doing business in the Philippines may avail of a preferential income tax rate or income tax exemption on their gross revenues derived from the carriage of persons and their excess baggage on the basis of the following: xxx xxx xxx B) Reciprocity . This may be invoked by an international carrier as basis for Gross Philippine Billings Tax exemption when its Home Country grants income tax exemption to Philippine carriers. The domestic law of the Home Country granting exemption shall cover income taxes and shall not refer to other types of taxes that may be imposed by the relevant taxing jurisdiction. The fact that the tax laws of the Home Country provide for exemption from business tax, such as gross sales tax, in respect of the operations of Philippine carriers shall not be considered as valid and sufficient basis for exempting an international carrier from Philippine income tax on account of reciprocity. Reciprocity requires that Philippine carriers operating in the Home Country of an international carrier are actually enjoying the income tax exemption ." Section 28 (A) (3) (a) of the Tax Code and Section 4.2 (B) of Revenue Regulations No. 15-2013 strictly require that for reciprocity to be invoked, the Philippine air carriers operating in the Netherlands must actually be enjoying tax exemption therein. This cannot be determined for the reason that there are no Philippine air carriers operating in international traffic in the Netherlands. Nonetheless, paragraph 2, Article 8 of the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") provides relief to KLM Airlines , to wit: aScITE " Article 8 SHIPPING AND AIR TRANSPORT 1. Profits derived by an enterprise of one of the States from the operation of ships and aircraft in international traffic may be taxed in that State. 2. However, such profits may also be taxed in the other State, but only in so far as such profits are derived from that other State. The tax so charged shall not exceed the lesser of: a) the rate of 1 1/2 per cent applied on the gross revenue derived from that other State, or b) emsp; the lowest rate of Philippine tax applied on such profits derived by an enterprise of a third State." Under paragraph 2, KLM Airlines is subject to the lesser of 1 1/2 percent on its Gross Philippine Billings, or the lowest rate of income tax on such Gross Philippine Billings derived by an enterprise of a third State (" most favored nation treatment "). Accordingly, since the Philippines has not yet granted a most-favored treatment to any international carrier of a third State under an effective tax treaty, KLM Airlines is subject to income tax of 1 1/2 percent on its Gross Philippine Billings pursuant to paragraph 2 (a), Article 8 of the Philippines-Netherlands tax treaty. To avail of such relief, KLM Airlines must submit to the International Tax Affairs Division of this Bureau an authenticated Certificate of Residence issued by the Tax Authority of the Netherlands, and a confirmatory ruling will then be issued by this Bureau therefor. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. https://www.philippineairlines.com/en/promotions and https://www.cebupacificair.com/ . 2. Revenue Regulations Implementing Republic Act No. 10378 entitled "An Act Recognizing the Principle of Reciprocity as Basis for the Grant of Income Tax Exemptions to International Carriers and Rationalizing other Taxes Imposed thereon by Amending Sections 28 (A) (3) (A), 109, 118 and 236 of the National Internal Revenue Code (NIRC), as amended, and for other Purposes."