Qatar Airways Company with Limited Liability (Philippine Branch Office)

June 26, 2020 ITAD BIR RULING NO. 047-20 Article 8 (Shipping and Air Transport) Philippines-Qatar tax treaty Qatar Airways Company with Limited Liability (Philippine Branch Office) Unit 803-804, One Global Place 5th Avenue corner 25th Street Bonifacio Global City 1634 Taguig City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on February 9, 2016 and your letters dated April 8, 2019 and February 15, 2019, requesting confirmation that Qatar Airways Company with Limited Liability (Philippines Branch Office) , hereinafter referred to as "Qatar Airways," is subject to a preferential tax rate of 1 1/2% on its Gross Philippine Billings (GPB) derived from the carriage of cargo pursuant to Article 8 (Shipping and Air Transport) of the Agreement between the Government of the Republic of the Philippines and the Government of the State of Qatar for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Qatar tax treaty"), and is not subject to 2% creditable withholding tax imposed under Section 2.57.2 (N) of Revenue Regulations (RR) No. 2-98, otherwise known as the Withholding Tax Regulation. Qatar Airways is a foreign corporation organized and existing under the laws of Qatar and a resident thereof based on its amended Articles of Association and Certificate of Residence issued by the General Tax Authority of Qatar. It was issued a license by the Securities and Exchange Commission on June 15, 2000 to establish its branch office in the Philippines for the following purposes: to engage in air transportation services for passengers and cargo; to establish offices for the purpose of booking tickets and marketing offers of air transportation; to ground handling for other airline's aircraft; to enter into contracts for maintenance of aircraft equipment and tools; and to lease aircraft equipment. It must be recalled that in BIR Ruling No. ITAD 11-15 dated January 21, 2015, this Office ruled, among others, that Qatar Airways is exempt from income tax on its GPB derived from the carriage of persons and their excess baggage on the basis of reciprocity. In a Certification dated March 14, 2019, this Office confirmed Qatar Airways' continuous exemption based on reciprocity there having been no substantial change in the Income Tax Law of Qatar granting tax exemption to foreign carriers operating in Qatar in compliance with the reportorial requirement under RR No. 15-2013. 1 All other revenues such as those derived from the carriage of cargo were not covered by the said exemption. aCIHcD In reply, please be informed that an international carrier doing business in the Philippines is subject to income tax of two and one-half percent (2 1/2%) based on its GPB, or to a preferential rate pursuant to an effective tax treaty, or may be exempt from income tax on the basis of reciprocity. Section 28 (A) (3) (a) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, provides to wit: "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: x x x 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." In this case, since the State of Qatar grants income tax exemption to foreign air carriers operating therein irrespective of the nature of its revenue, i.e. , whether it was derived from the carriage of persons, excess baggage, cargoes or mail, Qatar Airways is likewise exempt from tax but only on its GPB derived from the carriage of persons and excess baggage on the basis of reciprocity. Such exemption shall continue unless otherwise revoked by this Office for failure to comply with the conditions set for such grant. A different rule applies, however, to the GPB derived from the carriage of cargo and/or mail. For this purpose, Article 8 of the Philippines-Qatar tax treaty provides, to wit: "Article 8 SHIPPING AND AIR TRANSPORT 1. Profits from the operation of ships or aircraft in international traffic shall be taxable in the Contracting State in which the place of effective management of the enterprise is situated. 2. Notwithstanding the provisions of paragraph 1, gross revenues 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 one and one-half per cent (1 1/2%) of the gross revenues derived from sources in that State or the lowest rate that may be imposed on gross revenues of the same kind derived under similar circumstances by a resident of a third State. xxx xxx xxx" While generally, profits from the operation of ships or aircraft in international traffic are taxable in the country where the place of effective management of the enterprise is situated, it may, however, be subject to tax in the country where such profits were derived but only at maximum tax rate of 1 1/2%, or the lowest rate that may be imposed on gross revenues of the same kind derived under similar circumstances by a resident of a third State or the so-called most favored nation treatment . Profits or gross revenues may be used interchangeably as these only pertain to the tax base. Moreover, the above article does not limit the nature of activity that gives rise to such revenues or profits which may be subject to tax in the situs state. As emphasized in the commentaries of the Organisation for Economic Co-operation and Development (OECD) on Article 8 of the Model Tax Convention on Income and on Capital, the profits covered consist of the profits directly obtained by the enterprise from the transportation of passengers or cargo by ships or aircraft in international traffic and profits from activities which are not directly connected with, but are ancillary to, the operation of such enterprise's ship or aircraft, to wit: " COMMENTARY ON ARTICLE 8 CONCERNING THE TAXATION OF PROFITS FROM INTERNATIONAL SHIPPING AND AIR TRANSPORT Paragraph 1 xxx xxx xxx 4. The profits covered consist in the first place of the profits directly obtained by the enterprise from the transportation of passengers or cargo by ships or aircraft (whether owned, leased or otherwise at the disposal of the enterprise) that it operates in international traffic. However, as international transport has evolved, shipping and air transport enterprises invariably carry on a large variety of activities to permit, facilitate or support their international traffic operations. The paragraph also covers profits from activities directly connected with such operations as well as profits from activities which are not directly connected with the operation of the enterprise's ships or aircraft in international traffic as long as they are ancillary to such operation. ScHADI xxx xxx xxx" Considering that the Philippines has not granted a most favored nation treatment to a resident of a third State, the gross revenues derived by Qatar Airways from the carriage of cargo and/or mail are, therefore, subject to a preferential rate of 1 1/2%. As to whether Qatar Airways, a supplier of services should be fully exempt from the 2% creditable withholding tax, this Office hereby rules that it is only exempt from such withholding with respect to income payments for the carriage of passengers and excess baggage. Income payments for the carriage of cargo and/or mail, on the other hand, are subject to 1 1/2% creditable withholding tax. The purpose of creditable withholding tax system is to equal or at least approximate the tax due of the income recipient on a particular income. The income recipient is still required to file an income tax return, to report the income, and to pay the difference between the tax withheld and the tax due on the income. Section 2.57 (B) of RR No. 2-98 provides: " SECTION 2.57. Withholding of Tax at Source. (B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended, to report the income and/or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on income payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec. 2.78 also of these regulations) are creditable in nature." Finally, Qatar Airways is subject to 3% common carrier's tax on its quarterly receipts derived from the transport of cargo from the Philippines to another country pursuant to Section 118 (A) of the Tax Code, 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. xxx xxx xxx" Contrary to your position that Article 8 of the Philippines-Qatar tax treaty nullifies the taxability of Qatar Airways to a common carrier's tax of 3%, nothing therein states that the said treaty shall likewise apply to business taxes. Its applicability to income taxes only can be deduced from the title ("Agreement between the Government of the Republic of the Philippines and the Government of the State of Qatar for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ") of the tax treaty itself. Further, the income taxes covered by the tax treaty is described in a general way in Article 2 thereof, to wit: "Article 2 TAXES COVERED 1. This Agreement shall apply to taxes on income imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied. 2. The existing taxes to which the Agreement shall apply are, in particular: aICcHA a) in the Philippines: the income taxes imposed under the National Internal Revenue Code (hereinafter referred to as "Philippine tax"); b) in the State of Qatar: the income tax (hereinafter referred to as "Qatari tax"). 3. The Agreement shall also apply to any identical or substantially similar taxes which are imposed after the date of signature of this Agreement in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of substantial changes which have been made in their respective taxation laws." Paragraph 1 of the said article defines the scope of application of the tax treaty: taxes on income. Paragraphs 2 and 3, on the other hand, list exhaustively the taxes in each country to which the Convention will apply, and clarify that the Convention will also apply to subsequent taxes that are similar to those listed. The questioned percentage tax is not an income tax but a business tax, therefore, the tax treaty does not apply. 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. HSCATc Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. 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.