ITAD BIR Ruling No. 031-16

March 17, 2016 ITAD BIR RULING NO. 031-16 Articles 5 & 7, Philippines-Singapore tax treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Wilfredo U. Villanueva Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated March 16, 2012 requesting confirmation that profits derived by Tiger Airways Singapore Pte. Ltd. ("Tiger Airways") from the operation of aircraft in international traffic in the Philippines are subject to income tax at the rate of 1 1/2 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Republic of Singapore with respect to Taxes on Income (Philippines-Singapore tax treaty). It is represented that Tiger Airways is a non-resident foreign corporation organized and existing under the laws of Singapore and a resident thereof based on the Certificate of Residence issued by the Inland Revenue Authority of Singapore dated September 19, 2011; and that Tiger Airways is licensed to transact business in the Philippines through a branch office referred to as Tiger-Philippine Branch upon the grant of license by the Securities and Exchange Commission (SEC) for the purpose of engaging in international scheduled and chartered flights. In reply, please be informed that under Section 23 (F) of the National Internal Revenue Code (NIRC) of 1997, as amended, a foreign corporation like Tiger Airways , whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. It provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A Foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." In this regard, since Tiger Airways is engaged in trade or business in the Philippines as an international carrier, as evidenced by the license to transact in the Philippines issued by the SEC, it is generally subject to income tax at the rate of 2 1/2 percent based on its Gross Philippine Billings (GPB), in accordance with Section 28 (A) (3) of the NIRC, as amended, which provides: "SEC. 28. Rates of Income Tax on Foreign Corporations. Except when otherwise provided in this Code: (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 "(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, That 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. CAIHTE xxx xxx xxx" However, said income derived by a foreign corporation may be exempt or partially exempt pursuant to a treaty obligation to which the Philippine government is bound. Thus, Section 32 (B) (5) of the Tax Code of 1997, as amended provides, viz. : "SEC. 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title. xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." In this case, Tiger Airways invoked the Philippines-Singapore tax treaty. Article 8 of the Philippines-Singapore tax treaty provides as follows: "Article 8 Shipping and Air Transport 1. Profits from sources within a Contracting State derived by an enterprise of the other Contracting State from the operation of ships or aircraft in international traffic may be taxed in the first-mentioned State but the tax so charged shall not exceed whichever is the lesser of either: a) one and one-half per cent of the gross revenues derived from sources in that State; or b) the lowest rate of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State. 2. The provisions of paragraph 1 shall also apply to profits derived from the participation in a pool, a joint business or in an international operating agency." Based on the foregoing, the Philippines can tax the profits derived by a resident of Singapore from the operation of aircraft in international traffic in the Philippines, but the rate of income tax that might be imposed on such profits will not exceed the lesser of 1 1/2 percent of the gross amount thereof, or the lowest rate of income tax imposed by the Philippines on such profits derived by a resident of a third State under similar circumstances (also known as the most-favored-nation tax treatment). Accordingly, since the Philippines has not yet granted a most-favored-nation tax treatment on the taxation of profits from the operation of aircraft in international traffic, the rate of income tax that shall be imposed on the GPB of a resident of Singapore is 1 1/2 percent. Lastly, please be informed that Sections 118 (A) and (B) and 109 (1) (E) and (S) of the NIRC of 1997, as amended by Republic Act (RA) No. 10378 provide that common carrier's tax of 3 percent is imposed on the quarterly gross receipts of international carriers doing business in the Philippines derived from their transport of cargo and that transport of cargo and passengers of international carriers shall be exempt from 12 percent VAT, to wit: " SEC. 118. Percentage Tax on International Carriers . (A) International air carriers doing business in the Philippines on their gross receipts derived from transport of cargo from the Philippines to another country shall pay a tax of three percent (3%) of their quarterly gross receipts. (B) International shipping carriers doing business in the Philippines shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts derived from transport of cargo . (Emphasis supplied)" "SEC. 109. Exempt Transactions . The following shall be exempt from the value-added tax: (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax. xxx xxx xxx (E) Services subject to percentage tax under Title V; xxx xxx xxx (S) Transport of passengers by international carriers; xxx xxx xxx" In view of all the foregoing, this Office is of the opinion and so holds that: (1) Tiger Airways is subject to 1 1/2 GPB tax pursuant to Article 8 Section 1 (a) of the Philippines-Singapore tax treaty; (2) Tiger Airways , being an international carrier doing business in the Philippines, shall be subject to the common carrier's tax of 3 percent on the transport of cargo, as provided under Section 118 (A) of the NIRC, as amended by RA 10378 and as implemented by Section 5 of Revenue Regulations (RR) No. 15-2013; and (3) Tiger Airways is exempted from 12 percent VAT on its transport of cargo and transport of passengers as provided under Section 109 (1) paragraphs (E) and (S) of the NIRC of 1997, as amended, respectively. 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. DETACa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue