ITAD BIR Ruling No. 243-15

August 28, 2015 ITAD BIR RULING NO. 243-15 Article 8, Philippines-Japan tax treaty Japan Airlines International Co., Ltd. 2nd Floor, 6788 Ayala Avenue Oledan Square Makati City Attention: Daisuke Okumura Vice-President and Regional Manager-Philippines Gentlemen : This refers to your application for tax treaty relief dated June 26, 2012 requesting confirmation that profits derived by Japan Airlines International Co., Ltd. ("JAL") from the operation of aircraft in international traffic in the Philippines are subject to income tax at the rate of 1 1/2 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of Japan with respect to Taxes on Income, as amended by Protocol 1 (Philippines-Japan tax treaty) . It is represented that JAL is a non-resident foreign corporation organized and existing under the laws of Japan and a resident thereof based on the Certificate of Residence issued by the Shinagawa Tax Office in Japan dated June 28, 2012; that its primary purpose is to operate domestic and international air transportation services; that JAL is licensed to transact business in the Philippines through a branch office upon the grant of license by the Securities and Exchange Commission (SEC) for the purpose of engaging in the business of international scheduled journeys for the transportation and carriage by air passenger, freight, and mail to and from the Philippines under license to transact business. AScHCD It is further represented per certificate of no pending case issued by the Vice-President and Regional Manager-Philippines of JAL on June 25, 2012, 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. 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 JAL, 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 JAL 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 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." With respect to a treaty that may be invoked by JAL and all other residents of Japan, there is the Philippines-Japan tax treaty. Article 8 of the Philippines-Japan tax treaty provides as follows: 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. 2. The provisions of the preceding paragraph shall also apply to profits from the participation in a pool, a joint business or an international operating agency. Based on the foregoing, the Philippines can tax the profits derived by a resident of Japan from the operation of aircraft in international traffic in the Philippines, but the rate of income tax that might be imposed on such profits shall be 60 percent of 2 1/2% tax charged in the Philippines or 1 1/2 percent of the gross amount thereof. Furthermore, gross receipts of international carriers derived from transport of cargo are subject to a 3% Common Carrier's Tax (Percentage Tax of International Carriers) pursuant to Sec. 118 of the NIRC, as amended by RA 10378. It provides: "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)" In view of all the foregoing, this Office is of the opinion and so holds that: (1) JAL is subject to 1 1/2 GPB tax pursuant to Article 8 Section 1 of the Philippines-Japan tax treaty; (2) JAL, 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, as amended by RA 10378 and as implemented by Section 5 of Revenue Regulations (RR) No. 15-2013. 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. caITAC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. 2009 Protocol amending the Convention between the Government of the Republic of the Philippines and the Government of Japan with respect to Taxes on Income.