KLM Royal Dutch Airlines

March 11, 2020 ITAD BIR RULING NO. 027-20 Sections 106 (A) (2) (a) (6) and 108 (B) (4) National Internal Revenue Code of 1997, as amended KLM Royal Dutch Airlines 29th Floor, Yuchengco Tower, RCBC Plaza Ayala Avenue corner Gil Puyat Avenue 1200 Makati City Attention: AAA _______________ Gentlemen : This refers to your letters dated August 26, 2013 and December 7, 2016 requesting confirmation of your opinion that the supply of goods and services by local value-added tax ("VAT") -registered taxpayers to KLM Royal Dutch Airlines ("KLM Airlines") is either exempt from VAT or subject to zero percent (0%) VAT. As represented, KLM Airlines is a foreign airline corporation authorized to do business in the Philippines to perform international air transportation activities, that is, flight operations originating in the Philippines to a point outside the Philippines, and vice versa. It does not have any domestic flights, and offers and operates international flights only. It flies directly from the Philippines to a foreign port without docking or stopping at any other port in the Philippines to unload passengers or cargoes. KLM Airlines purchases goods and services from local VAT-registered suppliers, consisting of office and operational supplies, computers, and printers, and catering services for its flights, and rental for its office spaces. These are all intended for and attributable to KLM Airlines ' international flight business. In reply, please be informed that Sections 106 (A) (2) (a) (6) and 108 (B) (4) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended by Republic Act No. 10963 otherwise known as the Tax Reform for Acceleration and Inclusion Act, provide to wit: " SEC. 106. Value-Added Tax on Sale of Goods or Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to twelve percent (12%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. caITAC xxx xxx xxx (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales. The term 'export sales' means: xxx xxx xxx (6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations: Provided, That the goods, supplies, equipment and fuel shall be used for international shipping or air transport operations." " SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. xxx xxx xxx (B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof: Provided, That these services shall be exclusively for international shipping or air transport operations." Further, Section 2 of Revenue Regulations No. 13-2018 clarified the above provisions in this wise: " SECTION 2. AMENDMENTS. Sections 4.106-5, 4.108-3, 4.108-5, 4.109-1, 4.109-2, 4.110-3, 4.112-1, 4.114-1, 4.114-2, and 4.116 of RR No. 16-2005, as amended, are hereby further amended to read as follows: SEC. 4.106-5. Zero-Rated Sales of Goods or Properties . x x x The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export sales. 'Export Sales' shall mean: xxx xxx xxx (5) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations: Provided, That the goods, supplies, equipment, and fuel shall be used exclusively for international shipping or air transport operations. The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations is limited to goods, supplies, equipment and fuel that shall be used in the transport of goods and passengers from a port in the Philippines directly to a foreign port, or vice versa, without docking or stopping at any other port in the Philippines unless the docking or stopping at any other Philippine port is for the purpose of unloading passengers and/or cargoes that originated from abroad, or to load passengers and/or cargoes bound for abroad: Provided, further, that if any portion of such fuel, goods, supplies or equipment is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods, supplies, and equipment shall be subject to 12% VAT ." (Emphasis supplied) " SEC. 4.108-5. Zero Rated Sale of Services . xxx xxx xxx (4) Services rendered to persons engaged in international shipping or air transport operations, including leases of property for use thereof: Provided, that these services shall be exclusively for international shipping or air transport operations. Thus, the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines, the same being subject to twelve percent (12%) VAT under Sec. 108 of the Tax Code." ICHDca Applying the foregoing to the instant case, this Office is of the opinion and so holds that sale of goods, supplies, equipment, fuel, and services, including in-flight catering services and lease of property, to KLM Airlines to be used exclusively for its international air transport operations is subject to 0% VAT. However, any portion of such fuel, goods, supplies, equipment, or services utilized for other purposes, office and operational supplies, computers, printers, and office space rental are subject to 12% VAT for the simple reason that they are not utilized aboard or are not used for the international transport of passengers and cargoes of KLM Airlines . 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