ITAD BIR Ruling No. 190-11

July 11, 2011 ITAD BIR RULING NO. 190-11 Article 8 Philippines-Japan tax treaty, as amended Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Carolina A. Racelis Principal, Tax Services Gentlemen : This refers to your application dated February 28, 2011 requesting confirmation that the Gross Philippine Billings of All Nippon Airways Company Ltd. ("All Nippon") , are subject to a reduced rate of income tax of 1 1/2 percent pursuant to Article 8 of Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty") , as amended by the Protocol Amending the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income effective January 1, 2009. Basic Facts It is represented that All Nippon is a foreign corporation, organized and existing under the laws of Japan and is a resident of Japan, based on its Articles of Incorporation, as amended, on the information contained in the register issued by the Minatoku Branch, Tokyo Legal Affairs Bureau in Japan on October 26, 2010, and on the Certificate issued by the Shiba Tax Office in Japan on December 24, 2010; that All Nippon is located at 1-5-2 Higashi-shimbashi, Minato-ku, Tokyo 105-7133, Japan; that the aircraft of All Nippon are registered with the Civil Aviation Bureau, Ministry of Land, Infrastructure, Transport and Tourism of Japan; that All Nippon is registered as a corporation in the Philippines under SEC No. FS201018696 issued by the Securities and Exchange Commission ("SEC") and is licensed to establish a branch office in the Philippines to engage in international transportation of passengers and cargoes under the name All Nippon Airways Company Ltd. Philippines Branch ("All Nippon Branch Office") based on the License to Transact Business issued on November 24, 2010, and on the Certificate of Corporate Filing/Information issued on February 9, 2011; and that All Nippon Branch Office is situated at the 15th Floor, Tower 2, RCBC Plaza, Ayala Avenue Corner Sen. Gil Puyat Avenue, Makati City, Philippines. Ruling In reply, please be informed that the Gross Philippine Billings (as defined hereunder) of All Nippon Branch Office are subject to income tax at the rate of 2 1/2 percent. Section 28 (A) (3) (a) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides: ECAaTS "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 from tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. 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-Japan tax treaty, as amended. Paragraph 1, Article 8 thereof provides: Article 8 1. The profits of an enterprise of a Contracting State derived in the other Contracting State from the operation of ships or aircraft in international traffic may be taxed in that other Contracting State, but the tax so charged shall be 60 per cent of the tax which is chargeable under the laws of that other Contracting State in force on the date of signature of this Convention. Under paragraph 1 of Article 8, the income tax imposed on the Gross Philippine Billings of an enterprise of Japan engaged in the operation of aircraft in international traffic in the Philippines shall be reduced to 60 percent. Accordingly, the Gross Philippine Billings of All Nippon Branch Office , derived or accrued beginning February 2011 , 1 are subject to income tax at a reduced rate of 1 1/2 percent, which is 60 percent of the regular rate of 2 1/2 percent, pursuant to paragraph 1, Article 8 of the Philippine-Japan tax treaty, as amended. Furthermore, All Nippon Branch Office , being an international carrier, is subject to percentage tax equivalent to 3 percent tax its quarterly gross receipts. 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. AIHDcC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Pursuant to Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties.