ITAD BIR Ruling No. 071-11

March 2, 2011 ITAD BIR RULING NO. 071-11 Article 9 (Shipping and Air Transport) Philippines-United States of America tax treaty; BIR Ruling No. ITAD 107-08; BIR Ruling No. DA-ITAD 25-09 Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Atty. Mary Assumption S. Bautista-Villareal Principal Gentlemen : This refers to your letter dated January 15, 2009 filed on behalf of your client, FEDERAL EXPRESS CORPORATION (FedEx) , requesting confirmation that the Gross Philippines Billings of FedEx from its international air transport operation of shipments originating from the Philippines are subject to the preferential tax rate of one and one-half percent (1-1/2%) under the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-United States tax treaty"). IHTASa It is represented that FedEx is a foreign corporation organized and existing under the laws of the United States of America and is a resident of the United States, based on its Certificate of Residence issued by Ivy S. McChesney, Field Director, Accounts Management, Internal Revenue Service in Philadelphia, Pennsylvania, United States; that the principal office of Fedex is at 1209 Orange Street, Wilmington, Delaware, United States; that FedEx is authorized by the Civil Aeronautics Board (CAB) of the Philippine Department of Transportation and Communications since April 6, 1990 to engage in scheduled foreign air transportation with respect to cargoes on the route United States-Manila, and vice versa; that based on the Certificate of Filing of Articles of Merger of Foreign Corporation issued by the Philippine Securities and Exchange Commission (SEC) on September 22, 1989, the Articles of Merger by and between FedEx and Flying Tiger Line, Inc. (a United States corporation licensed to do business in the Philippines) was filed with the SEC on August 3, 1989; that on the same date, The Flying Tiger Line, Inc. filed an application with the SEC to amend and transfer its Certificate of Registration and License No. 396 (issued on December 11, 1963) to FedEx (the surviving corporation in the merger); that the Board of Investments, in its Certificate of Authority dated July 28, 1989, authorized FedEx to take over the activities of The Flying Tiger Line, Inc. (the absorbed corporation in the merger); that, on September 22, 1989, the SEC approved the Articles of Merger by cancelling License No. 396 issued to The Flying Tiger Line, Inc. and transferring and issuing the same to FedEx ; and that the place of business of FedEx in the Philippines is at Building 8045, Subic Bay International Airport, Subic Bay, Philippines. It is also represented that on March 26, 2008, FedEx and Airfreight 2100, Inc. (Air 21) entered into a Global Service Program Contract where both agreed to integrate the Fedex System with the Air 21 System to provide a leading, seamless transportation service to customers worldwide; that FedEx System means worldwide system for transportation, customs clearance, tracking and tracing of express shipments operated by FedEx and its affiliates; that Air 21 System means the system in the Philippines for transportation, customs clearance, tracking and tracing of express shipment operated by Air 21 ; that Air 21 has its principal place of business at the 3rd Floor, Cargohaus Building, NAIA Complex, Old MIA Road, Paraaque City, Philippines; and that the Contract took effect on November 1, 2007, and will have a term of five years from that date. It is finally represented that the issue or transaction subject of the application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal, based on the Sworn Statement by the Manager/Controller of FedEx dated January 15, 2009. In reply, please be informed that under Section 23 (F) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, a foreign corporation like FedEx , whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources in 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. AcHSEa xxx xxx xxx" In this case, since, FedEx is doing business in the Philippines as an international carrier, it is generally subject to income tax at the rate of 2 1/2 percent on its Gross Philippine Billings , in accordance with Section 28 (A) (3) of the Tax Code of 1997, as amended, which 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 the 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 port 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" However, notwithstanding Section 28 (A) (3) above, income derived by FedEx in the Philippines may be exempt from income tax (or partially exempt if subject to a reduced rate only) if such income is so exempt (or partially exempt) pursuant to a treaty obligation binding upon the Philippine government. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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." aEHIDT With respect to a treaty, what you invoked for this purpose is the Philippines-United States tax treaty . In connection with the taxation of international air carriers, paragraph 2, Article 9 of the Philippines-United States tax treaty and the corresponding Item 2 of the Text of the Resolution of the Ratification of the tax treaty by the United States Senate provide as follows: "Article 9 SHIPPING AND AIR TRANSPORT 1. Notwithstanding any other provision of this Convention, profits derived by a resident of one of the Contracting States from sources within the other Contracting State from the operation of ships in international traffic may be taxed by both Contracting States; however, the tax imposed by the other Contracting State may be as much as, but shall not exceed, the lesser of a) one and one-half percent 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. 2. Nothing in the Convention shall affect the right of a Contracting State to tax, in accordance with domestic laws, profits derived by a resident of the other Contracting State from sources within the first-mentioned Contracting State from the operation of aircraft in international traffic. 3. The provisions of paragraphs 1 and 2 shall also apply to profits derived from participation in a pool, a joint business or in an international operating agency." Text of the Resolution of the Ratification "Resolved (two-thirds of the Senators present concurring therein), That the Senate advise and consent to the ratification of the Convention signed at Manila on October 1, 1976, between the Government of the United States of America and the Government of the Republic of the Philippines with Respect to Taxes on Income, and an Exchange of Notes done at Washington on November 24, 1976, subject to the following: ITCcAD xxx xxx xxx (2) reservation that, notwithstanding the provisions of paragraph 2 of Article 9 of the Convention, the tax imposed on profits derived by a resident of one of the Contracting States from source within the other Contracting State from the operation of aircraft in international traffic may be as much as, but shall not exceed, the lesser of one and one-half percent of the gross revenue derived from sources within that State, and 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." Based on the foregoing, the Philippines may tax the profits derived by a resident of the United States from the operation of aircraft in international traffic in the Philippines, but the rate of income tax that may be imposed on such profits shall 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 clause ). Accordingly, and since the Philippines has not yet granted a most-favored-nation tax treatment on profits from the operation of aircraft in international traffic, the rate of income tax that applies to the Gross Philippine Billings of FedEx is 1 1/2 percent. (BIR Ruling No. ITAD 107-08 dated December 18, 2008; BIR Ruling No. DA-ITAD 25-09 dated February 27, 2009) Finally, being an international carrier, FedEx is also subject to a three percent (3%) percentage tax under Section 118 of the Tax Code of 1997, as amended, which provides: "SEC. 118. Percentage Tax on International Carriers. (A) International air carriers doing business in the Philippines shall pay a tax of three percent (3%) of their quarterly gross receipts." Pursuant to Section 10 of Revenue Regulations No. 15-02, 1 the same tax base used in computing the Gross Philippine Billings of FedEx will be used also in computing its quarterly gross receipts for purposes of the 3 percent tax. Section 10 provides: "SEC. 10. Common Carrier's Tax Liability of International Airline Companies. For purposes of determining Common Carrier's Tax Liability of international airline companies pursuant to Section 118 of the Code, gross receipts shall be the same as the tax base for computing Gross Philippine Billings as prescribed by these Regulations." cTDIaC 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Entitled Revenue Regulations Governing the Imposition of Income Tax on the Gross Philippine Billings, Other Income of International Air Carriers and Common Carrier's Tax Pursuant to Sections 28 (A) (3) (A), and 118 of the National Internal Revenue Code of 1997 as Well as the Manner of Claiming Deductions on Travel Expenses and Freight Charges Incurred Pursuant to Section 32 of the Same Code, effective May 30, 2002.