ITAD BIR Ruling No. 182-11

June 29, 2011 ITAD BIR RULING NO. 182-11 Article 8 (Shipping and Air Transport) Philippines-United Arab Emirates tax treaty Emirates-Philippine Branch Office 18th Floor, Pacific Star Building Senator Gil Puyat Avenue corner Makati Avenue Makati City Attention: Ms. Maria Brigitte de Vera Baroa Manager Gentlemen : This refers to your letter dated January 8, 2009, requesting confirmation that the Gross Philippine Billings of Emirates are subject to a reduced rate of 1 1/2 percent pursuant to the Agreement Between the Government of the Republic of the Philippines and the Government of the United Arab Emirates for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital ("Philippines-United Arab Emirates tax treaty") . Basic Facts It is represented that Emirates is a foreign corporation organized and existing under the laws of the United Arab Emirates, with postal address at P.O. Box 686, Dubai, United Arab Emirates; that Emirates is established under Decree No. (2) 1985 issued by the Crown Prince and Deputy Ruler of the Emirate of Dubai of the United Arab Emirates on June 26, 1985; that the primary purpose of Emirates as a corporation is to operate domestic and international commercial air services, to transport passengers and other commercial loads including cargoes and mails, and, as such, to own, rent, lease, and operate planes; that Emirates is the designated and sole national air carrier of the Emirate of Dubai; that Emirates is licensed by the Securities and Exchange Commission to engage in commercial air services in the Philippines, based on the License issued on June 15, 1990; and that Emirates has a branch office in the Philippines ("Emirates Branch Office") situated at the 18th Floor, Pacific Star Building, Senator Gil Puyat Avenue corner Makati Avenue, Makati City, Philippines. 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, based on the Certification issued by the Manager of Emirates Branch Office on February 10, 2009. HTASIa Ruling A. On income tax In reply, please be informed that the Gross Philippine Billings (as defined hereunder) of Emirates Branch Office are subject to income tax at the rate of 2 1/2 percent. 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, such Gross Philippine Billings may be exempt or subject to a reduced rate to the extent required by any treaty obligation of the Philippine government. Section 32 (B) (5) of the Code 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." With respect to a treaty, you invoke the Philippines-United Arab Emirates tax treaty. Paragraphs 1 and 2, Article 8 thereof provide: "Article 8 SHIPPING AND AIR TRANSPORT 1. Profits derived by an enterprise which has its place of effective management in a Contracting State from the operation in international traffic of ships or aircraft shall be taxable in that State. 2. 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 that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State. cAaDCE Under paragraph 2 above, profits from the operation of air transport in international traffic derived by an enterprise of the United Arab Emirates from sources in the Philippines may be taxed in the Philippines at a rate not to exceed (a) 1 1/2 percent, or (b) the lowest rate of income tax imposed by the Philippines on such profits derived under similar circumstances by a resident of a third State. Accordingly, since the Philippines has not yet granted any other rate of income tax on the Gross Philippine Billings of an enterprise of a third State, the Gross Philippine Billings of Emirates Branch Office are subject to income tax at the rate of 1 1/2 percent pursuant to paragraph 2 (a), Article 8 of the Philippines-United Arab Emirates tax treaty. B. On Percentage Tax Furthermore, the quarterly gross receipts of Emirates Branch Office are subject to a percentage tax of 3 percent . Section 118 of the Tax Code, as amended, 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." 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