ITAD BIR Ruling No. 120-16

June 29, 2016 ITAD BIR RULING NO. 120-16 Articles 7 & 8, Philippines-China tax treaty China Eastern Airlines Level 22, Tower 1, 6766 Ayala Avenue corner Paseo de Roxas Makati City Attention: Chen Li Wei General Manager, Manila Office Gentlemen : This refers to your application for tax treaty relief dated March 11, 2015 requesting confirmation that (1) profits derived by China Eastern Airline Co., Ltd. ("CEA") from the operation of aircraft in international traffic in the Philippines are subject to income tax at the rate of 1 1/2 percent based on the gross amount thereof; and (2) that profits remitted by China Eastern Airline Co., Ltd.-Manila Office ("CEA-PH") to CEA are subject to 10 percent branch profits remittance tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the People's Republic of China with respect to Taxes on Income (Philippines-China tax treaty) . It is represented that CEA is a foreign corporation organized and existing under the laws of China and a resident thereof based on its Certificate of Chinese Fiscal Residence issued by the Director of Changning City, Shanghai Province, Office of State Administration of Taxation on November 18, 2014; the scope of business of the Company includes domestic and approved international and regional business for air transportation of passenger, cargo, mail, luggage and extended services; general aviation business; maintenance of aviation equipment; agency business for domestic and overseas airlines and other business related to air transportation, among others; and that CEA is licensed to transport passengers and cargos from Ninoy Aquino International Airport to Pudong Airport, Shanghai, China and vice-versa through a branch office referred to as CEA-PH upon the grant of license by the Securities and Exchange Commission (SEC) on May 8, 2013. In reply, please be informed that under Section 23 (F) of the National Internal Revenue Code (NIRC) of 1997, as amended, a foreign corporation like CEA, 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." In this regard, since CEA is engaged in trade or business in the Philippines as an international carrier, as evidenced by the license to transact in the Philippines issued by the SEC, it is generally subject to income tax at the rate of 2 1/2 percent based on its Gross Philippine Billings (GPB), in accordance with Section 28 (A) (3) of the NIRC, as amended, which provides: "SEC. 28. Rates of Income Tax on Foreign Corporations . Except when otherwise provided in this Code: (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 "(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. xxx xxx xxx" Furthermore, profits remitted by CEA-PH to its head office in China are generally subject to a branch profits remittance tax of 15 percent based on the total profits applied or earmarked for remittance as provided under Section 28 (A) (5) of the same Code, to wit: "5) Tax on Branch Profits Remittances . Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. . ." However, said income derived by a foreign corporation may be exempt or partially exempt pursuant to a treaty obligation to which the Philippine government is bound. Thus, Section 32 (B) (5) of the Tax Code of 1997, as amended provides, viz. : "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." In this respect, CEA invoked the Philippines-China tax treaty. In connection with the 2 1/2 percent income tax on the Gross Philippine Billings of international carrier, Article 8 of the Philippines-China tax treaty provides as follows: "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 enterprise is a resident. 2. The provisions of paragraph 1 shall also apply to profits 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 one and one-half per cent of the gross revenues derived from sources in that State." Based on the foregoing, the Philippines can tax the profits derived by a resident of China from the operation of aircraft in international traffic in the Philippines, but the rate of income tax that might be imposed on such profits will not exceed 1 1/2 percent of the gross revenues derived from sources in the Philippines. As regards the profits remitted by a branch to its head office, Article 7 (7) of the Philippines-China treaty provides: "Article 7 Business Profits xxx xxx xxx 7. Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article. Apart from the corporate income tax, a tax on remittance of profits by a branch to its head office may be imposed provided that the tax shall not exceed 10 per cent of the amount remitted. " Accordingly, aside from corporate income tax, the Philippines can impose a tax not exceeding 10 percent on the remittance of profits by a branch office in the Philippines to its head office in China. Lastly, please be informed that Sections 118 (A) and (B) and 109 (1) (E) and (S) of the NIRC of 1997, as amended by Republic Act (RA) No. 10378 provide that common carrier's tax of 3 percent is imposed on the quarterly gross receipts of international carriers doing business in the Philippines derived from their transport of cargo and that transport of cargo and passengers of international carriers shall be exempt from 12 percent VAT, 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. (B) International shipping carriers doing business in the Philippines shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts derived from transport of cargo . (Emphasis supplied)" "SEC. 109. Exempt Transactions . The following shall be exempt from the value-added tax: (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the 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; xxx xxx xxx" In view of all the foregoing, this Office is of the opinion and so holds: (1) CEA is subject to 1 1/2 GPB tax pursuant to Article 8 Section 1 (a) of the Philippines-China tax treaty; (2) The profits remitted by CEA-PH to CEA in China is subject to 10 percent branch profits remittance tax based on Article 7 (7) of the Philippines-China tax treaty; (3) CEA, 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 of 1997, as amended by RA 10378 and as implemented by Section 5 of Revenue Regulations (RR) No. 15-2013; and (4) CEA is exempted from 12 percent VAT on its transport of cargo and transport of passengers as provided under Section 109 (1) paragraphs (E) and (S) of the NIRC of 1997, as amended, respectively. 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