ITAD BIR Ruling No. 145-15

May 4, 2015 ITAD BIR RULING NO. 145-15 Article 9 (Shipping and Air Transport); Philippines-US tax treaty Quisumbing Torres Law Offices 12th Flr., Net One Center, 26th Street, Corner 3rd Avenue, Crescent Park West, Bonifacio Global City, Taguig City Attention: Ver Angelo N. Sumabat Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 28 December 2012 requesting confirmation that United Airlines, Inc. ("United Air-US") is subject to Gross Philippine Billings at the preferential rate of one and a half percent (1 1/2%) pursuant to 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-US tax treaty") . It is represented that United Air-US is a foreign corporation residing in the United States based on a consularized and notarized Certificate of Residency issued by the US Internal Revenue Service. The company United Air-US is a corporation organized and existing under the laws of the State of Delaware based on a consularized and notarized Restated Certificate of Incorporation issued by the Secretary of State, Division of Corporations, State of Delaware. United Air-US is licensed to establish a branch office in the Philippines based on a Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on 16 January 2013 and that United Air-US is licensed to do business in the Philippines to act as an off-line carrier in the Republic of the Philippines to provide international air services to and from the Philippines, market its flight operations and sell its services in the Philippines based on a certified machine copy of Amended SEC License No. 1094 issued by the Securities and Exchange Commission. In reply, please be informed that Section 28 (A) (3) of the National Internal Revenue Code (NIRC) of 1997, as amended by R.A. No. 10378 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 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 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. xxx xxx xxx." In connection with the taxation of international carriers, paragraph (2), Article 9 of the Philippines-US 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 provides 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 this 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, or 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: 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 the 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 United Air-US is 1 1/2 percent. Moreover, United Air-US is exempt from VAT on transport of persons and cargoes pursuant to Section 109 (1) (E) and (S) of the NIRC of 1997, as amended, respectively, to wit: "SEC. 109. Exempt Transactions . (1) Subject to the provisions of Subsection (2) hereof, the following transactions 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; xxx xxx xxx" Furthermore, United Air-US shall be subject to the 3% percentage tax on transport of cargoes under Section 118 of the NIRC of 1997, as amended, which provides as follows: "(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." (Emphasis supplied) In view of the foregoing, this Office is of the opinion and so holds that: (1) United Air-US is subject to 1 1/2% on its gross revenue derived from the Philippines pursuant to the Philippines-US tax treaty ; (2) United Air-US is exempt from VAT pursuant to Sec. 109 (1) (E) and (S) of the NIRC of 1997, as amended; and (3) United Air-US is subject to 3% percentage tax on transport of cargo pursuant to Sec. 118 of the NIRC of 1997, as amended. 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