ITAD BIR Ruling No. 212-11

August 15, 2011 ITAD BIR RULING NO. 212-11 Article 8 (Shipping and Air Transport); Philippines-Korea tax treaty Air Busan Company Ltd. Room S213-01, International Departure Level Mactan Cebu International Airport Lapu-Lapu City, Cebu Attention: Hoang Young Jo General Manager Gentlemen : This refers to your Tax Treaty Relief Application filed on April 4, 2011 requesting confirmation that the Gross Philippine Billings of Air Busan Company Ltd. ("Air Busan") are subject to a reduced rate of 1 1/2 percent pursuant to the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Korea tax treaty"). Basic Facts It is represented that Air Busan is a foreign corporation organized and existing under the laws of Korea, and is a resident of Korea based on its Articles of Incorporation, as amended, and on the Certificate of Residence issued by the Busajin Tax Office in Korea on February 25, 2011; that Air Busan is situated at 853-1 Beomcheon-dong, Busanjin-gu, Busan, Korea; that the primary purpose of Air Busan is to operate domestic and international air transportation services; that Air Busan is licensed by the Securities and Exchange Commission to establish a branch office in the Philippines to engage in the business of undertaking international scheduled journeys for the transportation and carriage by air of passenger, freight, and mail, to and from the Philippines, under License to Transact Business issued on November 30, 2010 and under Company Registration No. FS 201018670; and that the branch office ("Air Busan Branch Office") is situated at Room S213-01, International Departure Level, Mactan Cebu International Airport, Lapu-Lapu City, Cebu, 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 General Manager of Air Busan Branch Office on April 4, 2011. EScAID Ruling A. On income tax In reply, please be informed that the Gross Philippine Billings (as defined hereunder) of Air Busan 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 from income 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." STaHIC With respect to a treaty, you invoke the Philippines-Korea tax treaty. Article 8 thereof provides: "Article 8 SHIPPING AND AIR TRANSPORT 1. Profits of an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State. 2. The provisions of paragraph 1 shall also apply to profits derived 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 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 of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State." Under paragraph 3 of Article 8, profits from the operation of air transport in international traffic derived by an enterprise of Korea 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 ( "most-favored-nation treatment" ). Accordingly, since the Philippines has not yet granted an exemption or a most-favored-nation treatment relating to the taxation of profits from the operation of air transport in international traffic, the Gross Philippine Billings of Air Busan are subject to income tax at the rate of 1 1/2 percent pursuant to paragraph 3 (a), Article 8 of the Philippines-Korea tax treaty. B. On Percentage Tax Furthermore, the quarterly gross receipts of Air Busan, being an international air carrier doing business in the Philippines, are subject to a percentage tax of 3 percent. Section 118 of the Tax Code, as amended, provides: TaCDcE "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