Jeju Air Co. Ltd.

April 3, 2018 ITAD BIR RULING NO. 062-18 Article 8 (Shipping and Air Transport) Philippines- Korea tax treaty Jeju Air Co. Ltd. 704 Pablo Ocampo Street 1004 Malate, Manila Attention: AAA __________ Gentlemen : This refers to your application for tax treaty relief dated March 21, 2012 requesting confirmation that Jeju Air Co. Ltd. (" Jeju Air ") is subject to income tax at the rate of 1 1/2 percent on its Gross Philippine Billings pursuant to the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Korea tax treaty "). It is represented that Jeju Air is a corporation organized and existing under the laws of Korea based on its Amended Articles of Incorporation and its Certificate of Business Registration issued by the Jeju District Tax Office in Korea; that it is engaged in domestic and foreign air transportation business; that it is licensed by the Securities and Exchange Commission to establish a branch office in the Philippines; and that the branch office is licensed to engage in air transportation services for passengers, cargo and mail, to enter into contracts for the purpose of booking tickets and marketing offers of air transportation, ground handling services, maintenance of aircraft as well as aircraft equipment and tools. 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 Jeju Air 's Regional Branch Manager. HTcADC In reply, please be informed that under Section 28 (A) (3) (a) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), Jeju Air , as an international air carrier engaged in trade or business in the Philippines through a branch office, is subject to income tax at the rate of 2 1/2 percent on its Gross Philippine Billings, thus: " (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: xxx xxx xxx (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." 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. : " (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." With respect to the treaty, Article 8 (Shipping and Air Transport) of the Philippines-Korea tax treaty provides: " Article 8 SHIPPING AND AIR TRANSPORT 1. Profits of an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State. 2. The provisions of paragraph 1 shall also apply to profits derived from the participation in a pool, a joint business or an international operating agency. 3. 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 of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State." Under paragraph 3 of Article 8, profits from sources within the Philippines derived by an enterprise of Korea from the operation of ships or aircraft in international traffic may be taxed in the Philippines at a rate not to exceed (a) 1 1/2 percent of the gross revenues derived from sources in the Philippines, or (b) the lowest rate of income tax that may be imposed by the Philippines on such profits derived under similar circumstances by a resident of a third State (" most-favored-nation treatment "). Accordingly, since the Philippines has not yet granted a most-favored-nation treatment to international air carriers of a third State pursuant to a tax treaty between the Philippines and the third State, Jeju Air is subject to income tax at the rate of 1 1/2 percent on its Gross Philippine Billings pursuant to paragraph 3 (a), Article 8 of the Philippines-Korea tax treaty . Moreover under Section 118 (A) of the Tax Code, Jeju Air is subject to common carrier's tax at the rate of three percent (3%) of its quarterly gross receipts, thus: "(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. aScITE Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue