ITAD BIR Ruling No. 034-17

November 6, 2017 ITAD BIR RULING NO. 034-17 Article 8 (Shipping and Air Transport) Philippines-Kuwait tax treaty ______________________________ ______________________________ ______________________________ ______________________________ Attention: ____________________ ____________________ ____________________ Gentlemen : This refers to your tax treaty relief application filed on June 5, 2015 requesting confirmation that Corporation 1 (" Corp1 ") is subject to income tax of 1 1/2% on its Gross Philippine Billings (" GPB ") pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the State of Kuwait for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Kuwait tax treaty "). SDHTEC FACTS Corp1 is a foreign corporation organized and existing under the laws of Kuwait and a resident thereof based on its Articles of Association and Certificate of Residency issued by the Ministry of Finance of Kuwait. The Articles of Association of Corp1 has been duly approved by the National Assembly of Kuwait on June 5, 1965 under Law No. 21/1965 giving it the status of a public corporation in that country where the Kuwait government owns all profits of Corp1 and will cover its losses. The business activities of Corp1 include all types of air transportation in Kuwait and abroad, as well as management and developing the business and installations related to air navigation affairs. Based on the Operations Specifications issued to Corp1 by the Directorate General of Civil Aviation of Kuwait, the regions of navigation allowed to Corp1 by the International Civil Aviation Organization are the continents of Europe, Middle East, Africa, Asia and America. Corp1 is allowed by the Securities and Exchange Commission (" SEC ") to establish a branch office in the Philippines to engage in air transport services based on a resolution issued by the SEC on July 31, 1980. It started operations in the Philippines on November 1, 1980. Based on the current Validation of Air Operator Certificate issued by the Civil Aviation Authority of the Philippines, Corp1 is allowed to conduct commercial air transport operations into, within, or from Philippine territory, specifically, Kuwait to Manila, and, Manila to Kuwait. RULING In reply, please be informed that under Section 28 (A) (3) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), international carriers (air transport and shipping) doing business in the Philippines are subject to income tax on their GPB at the rate of 2 1/2%. Likewise, international carriers may avail of a preferential rate or exemption on their GPB on the basis of an applicable tax treaty or international agreement to which the Philippines is a signatory, or on the basis of reciprocity where the home country of these carriers exempt Philippine carriers from income tax doing business in the former's territories. Section 28 (A) (3) provides: " 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, 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. HESIcT (b) International Shipping. 'Gross Philippine Billings' means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. 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." 1 In the case of Corp1 , it invokes solely the Philippines-Kuwait tax treaty, effective January 1, 2014. Article 8 thereof provides: " Article 8 SHIPPING AND AIR TRANSPORT 1. Profits from the operation of ships or aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 2. Notwithstanding the provisions of paragraph 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 the lesser of: a) one and one-half per cent of the gross revenues derived from sources in that State; and b) the lowest rate that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State." Under Article 8, international carriers of Kuwait doing business in the Philippines are subject to income tax on their GBP at the rate of 1 1/2%, or the lowest rate imposed on the GPB of international carriers of a third country (the so called "most-favored-nation treatment" ). Accordingly, since the Philippines, to date, has not granted a most-favored-nation treatment to any international air carrier of a third country, Corp1 is subject to income tax of 1 1/2% on its GPB earned beginning January 1, 2014 , pursuant to paragraph 2 (b), Article 8 of the Philippines-Kuwait tax treaty. Furthermore, under Section 118 (A) of the Tax Code, Corp1 is subject to common carriers' tax of 3% on its quarterly gross receipts imposed, thus: " 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." 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. Introduced in 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 , as implemented by Revenue Regulations 15-2013 .