ITAD BIR Ruling No. 117-16

June 29, 2016 ITAD BIR RULING NO. 117-16 Article 8 (Shipping and Air Transport), Philippines-Netherlands tax treaty Isla Lipana & Co . 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City, Philippines Attention: Lawrence C. Biscocho Partner, Tax Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on August 2, 2013 , requesting confirmation that Koninklijke Luchtvaart Maatschappij N.V. , commonly known as KLM Royal Dutch Airlines ("KLM Airlines") , is subject to income tax at the rate of 1 1/2 percent on its Gross Philippine Billings from the carriage of cargoes and mails and that it is only subject to tax on its revenue derived from uplifts from the Philippines where the passage documents are sold in the Philippines pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . Facts KLM Airlines is a foreign corporation and a resident of Netherlands based on its Articles of Association and Declaration of Residence issued by the Tax Administration of Arnhem in the Netherlands on September 11, 2013. It is located at Amsterdamseweg 55, 1182 GP Amstelveen, Netherlands. KLM Airlines is engaged to carry on the business of air transport and in any other activities of a commercial, industrial or financial nature. Based on the license issued by the Securities and Exchange Commission on August 8, 1955, KLM Airlines is licensed to engage business in the Philippines under Company Registration No. F000000284. KLM Airlines' branch office in the Philippines is located at 39th Floor, Yuchengco Tower, RCBC Plaza, Sen. Gil Puyat Avenue, Makati City, Philippines. KLM Airlines is the owner of the various aircrafts duly registered with the Transport and Water Management Inspectorate Civil Aviation Authority Netherlands which it uses in its flights going to and from the Philippines. Ruling a. On Income Tax In reply, please be informed that under Section 28 (A) (3) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, 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 Philippine, 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." However, under Section 32 (B) (5) of the Tax Code, such Gross Philippine Billings may be exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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." With respect to a treaty, you invoke the Philippines-Netherlands tax treaty. Article 8 thereof provides: "Article 8 Shipping and Air Transport 1. Profits derived by an enterprise of one of the States from the operation of ships and aircraft in international traffic may be taxed in that State. 2. However, such profits may also be taxed in the other State, but only in so far as such profits are derived from that other State. The tax so charged shall not exceed the lesser of: a) the rate 1 1/2 per cent applied on the gross revenue derived from that other State, or b) the lowest rate of Philippine tax applied on such profits derived by an enterprise of a third State. 3. For the purposes of this Article, profits derived from the other State mean profits as determined under its domestic law realized from the carriage of passengers, excess baggage, mail, livestock or goods boarded or loaded in that other State by a shipping enterprise doing business in that State of passage documents sold therein or from uplifts anywhere in the world by an international carrier doing business in that other State of passage documents sold therein, provided that in such cases the mail, livestock or goods originate from that other State. Profits realized from the carriage of passengers, excess baggage, mail, livestock or goods which are brought to that other State solely for transshipments, or for transfer from one aircraft to another or from an aircraft to a ship or from a ship to an aircraft shall not be included. Profits from chartered flights originating from that other State shall be deemed to be derived from that State regardless of the place of sale of the passage documents. For purposes of determining the taxability of profits from chartered flights, the term "originating from that other State" shall include flights of passengers who stay in that other State for more than 48 hours prior to embarkation." Under the abovementioned Article, gross revenues derived by an enterprise of the Netherlands from the operation of aircraft in international traffic in the Philippines may be taxed in the Philippines at a rate of 1 1/2 percent, or at the lowest rate of income tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State ("most favored nation treatment") ; that profits derived in the Philippines mean profits as determined under Philippine laws realized from (a) carriage of passengers, excess baggage, mail, livestock or goods boarded or loaded in the Philippines by a shipping enterprise doing business in the Philippines; and (b) passage documents sold in the Philippines from uplifts anywhere in the world by an international carrier doing business in the Philippines. Accordingly, since the Philippines has not granted such most favored nation treatment in any of its tax treaties, the Gross Philippine Billings derived by KLM Airlines from carriage of cargoes and mail originating from the Philippines which the ticket or passage document is sold in the Philippines shall be subject to preferential income tax at the rate of 1 1/2 percent , pursuant to paragraph 2 (a), Article 8 of the Philippines-Netherlands tax treaty. b. On Percentage Tax and VAT Furthermore, gross receipts of international carriers derived from transport of cargo are subject to a 3% Common Carrier's Tax (Percentage Tax of International Carriers) while the transport of passengers is no longer subject to Common Carrier's Tax pursuant to Sec. 118 of the Tax Code, as amended by Republic Act (RA) 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.") , 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." Moreover, since transport of cargo of KLM Airlines is already subject to Common Carrier's tax of 3%, it is no longer subject to Value-Added Tax (VAT) of 12% pursuant to Section 109 E of the Tax Code, as amended. On the other hand, its transport of passengers is also exempt from VAT pursuant to Section 109 S of the Tax Code, as amended by R.A. No. 10378, 1 to wit: "Sec. 109. Exempt Transactions . The following shall be exempt from value-added tax: xxx xxx xxx (E) Services subject to percentage tax under Title V; xxx xxx xxx (S) Transport of passengers by international carriers;" In view of all the foregoing, this Office is of the opinion and so holds that: (1) KLM Airlines is subject to 1 1/2 GPB tax on its transport of cargo pursuant to Article 8 Section 1 of the Philippines-Netherlands tax treaty in relation to RA No. 10378; (2) KLM Airlines , being an international carrier doing business in the Philippines, shall be subject to the common carrier's tax of 3 percent on the transport of cargo, as provided under Section 118 (A) of the NIRC, as amended by RA 10378 and as implemented by Section 5 of Revenue Regulations (RR) No. 15-2013; and (3) KLM Airlines is exempted from 12 percent VAT both on its transport of cargo and passenger, as provided under Section 109 (E) and (S), of the NIRC, as amended by RA 10378, as implemented by Section 6 of RR No. 15-2013. 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. Implemented by Revenue Regulations No. 15-2013.