ITAD BIR Ruling No. 031-17

October 19, 2017 ITAD BIR RULING NO. 031-17 Article 8 Philippines-Japan tax treaty; BIR Ruling No. ITAD 243-15 ______________________________ ______________________________ ______________________________ Attention: ____________________ ____________________ Gentlemen : This refers to your application for tax treaty relief dated October 18, 2013 requesting confirmation that profits derived by Corporation 1 (" Corp1 ") from the operation of aircraft in international traffic in the Philippines are subject to Gross Philippine Billings (" GPB ") tax at the rate of 1 1/2% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of Japan with respect to Taxes on Income (" Philippines-Japan tax treaty "), 1 and that payments to Corp1 by any of the top 20,000 corporations in the Philippines are not subject to creditable withholding tax of 2% since the GPB tax is a final tax. HTcADC It is represented that Corp1 is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its Certificate of Residence issued by the __________ Tax Office in Japan; that it is engaged in the business of providing scheduled and non-scheduled air transportation, buying, selling, leasing, and maintenance of aircraft and aircraft parts, and aircraft transportation ground support including passenger boarding procedures and loading of hand baggage; and that Corp1 is licensed to transact business in the Philippines through a branch office [namely, Corporation 2-Philippine Branch Office (" Corp2-PH Branch ")] based on the license granted to it by the Securities and Exchange Commission allowing Corp1 to engage in the international transportation of passengers and cargo in the Philippines. It is further represented that the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, per certificate of no pending case issued by Corp2-PH Branch . In reply, please be informed that under Section 28 (A) (3) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), international air carriers doing business in the Philippines are subject to income tax on their GPB at the rate of 2 1/2%, thus: " SEC. 28. Rates of Income Tax on Foreign Corporations. Except when otherwise provided in this Code: xxx xxx xxx (A) Tax on Resident Foreign Corporations. (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, 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. 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." However, under Section 32 (B) (5) of the Tax Code, said income is exempt or partially exempt pursuant to a treaty obligation binding upon the Philippine government, viz. : aScITE " 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." Relative thereto, Article 8 of the Philippines-Japan tax treaty provides as follows: " Article 8 1. The profits of an enterprise of a Contracting State derived in the other Contracting State from the operation of ships or aircraft in international traffic may be taxed in that other Contracting State, but the tax so charged shall be 60 per cent of the tax which is chargeable under the laws of that other Contracting State in force on the date of signature of this Convention. 2. The provisions of the preceding paragraph shall also apply to profits from the participation in a pool, a joint business or an international operating agency." Based on the foregoing, the Philippines may tax profits derived by a resident of Japan from the operation of aircraft in international traffic in the Philippines, but the rate of income tax shall be reduced to 60% of the tax chargeable on those profits (BIR Ruling No. ITAD 243-15) . Hence, with a GPB tax of 2 1/2% tax, the applicable tax on the GPB of Japanese international air carriers is 1 1/2%. Accordingly, Corp1 is subject to a tax of 1 1/2% on its GPB pursuant to Article 8 of the Philippines-Japan tax treaty. This office also rules that Corp1 cannot be exempt from the GPB tax pursuant to Republic Act ("RA") No. 10378, 2 as implemented by Revenue Regulations ("RR") No. 15-2013. 3 As reflected in the amended Section 28 (A) (3) of the Tax Code, international carriers doing business in the Philippines may avail of exemption from the GPB tax on the basis of reciprocity, where the Philippine government should grant exemption to Japanese international air carriers if the Japanese government affords the same exemption to Philippine international air carriers in Japan. In this connection, you failed to provide supporting documents to prove that Philippine air carriers in Japan are exempt from income tax in that country. Hence, we reiterate that Corp1 is subject to income tax in the Philippines on its GPB at the treaty rate of 1 1/2%. In addition, pursuant to Section 118 (A) of the Tax Code as amended, Corp1 , an international carrier doing business in the Philippines, shall be subject to common carriers' tax of 3% based on its quarterly gross receipts. It provides: " 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. xxx xxx xxx" Finally, on your request that payments to Corp1 by any of the top 20,000 corporations in the Philippines are not subject to creditable withholding tax of 2% since the GPB tax is a final tax, it must be stressed that the GPB tax on international carriers is not a final income tax. As defined under Section 2.57 (A) of RR 2-98, 4 final withholding tax is the amount of income tax withheld by the withholding agent which is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income. HEITAD The 2 1/2% GPB tax imposed on international carriers is only an exception to the 30% income tax imposed on resident foreign corporations. The tax withheld by customers of Corp1 is not considered as the full and final payment of Corp1 's income tax due. When the customer is any of the top 20,000 corporations in the Philippines, the customer is mandated to withhold 2% creditable withholding tax on income payments to Corp1 , pursuant to Section 2.57.2 (W) of RR 2-98. At the same time, Corp1 , or its branch office ( Corp2-PH Branch ), is required to file an income tax return on its GPB and other income derived from sources within the Philippines, as prescribed under Section 52 of the Tax Code, and to report the income and pay the difference between the tax withheld and the tax due on the income, if any. Section 2.57.1 (A)-(K) of RR 2-98 provides a long list of income payments subject to final withholding tax and GPB is not among them. Thus, income payments to Corp1 , or its branch office ( Corp2-PH Branch ), by any of the top 20,000 corporations in the Philippines shall continue to be subject to the 2% creditable withholding tax under Section 2.57.2 (W) of RR 2-98. At the very least, since Corp1 is subject to GPB tax at a treaty rate of 1 1/2%, the top 20,000 corporations may withhold a creditable income tax of 1 1/2% instead of 2%. In view of all the foregoing, this Office is of the opinion and so holds that: 1. Corp1 is subject to 1 1/2 GPB tax pursuant to Article 8 of the Philippines-Japan tax treaty; 2. Corp1 is not entitled to exemption from the GPB on the basis of reciprocity under RA 10378, as implemented by RR 15-2013; 3. Corp1 is subject to 3% common carriers' tax under Section 118 (A) of the Tax Code; and 4. Any of the top 20,000 corporations in the Philippines making income payments to Corp1 shall withhold creditable income tax at the rate of 1 1/2%. 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. As amended by the Protocol Amending the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to the Taxes on Income effective January 1, 2009 . 2. 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. 3. 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. 4. Implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue Code, as Amended" Relative to the Withholding on Income Subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation, Withholding of Creditable Value-Added Tax and Other Percentage Taxes, as Amended.