ITAD Ruling No. 091-04

August 31, 2004 ITAD RULING NO. 091-04 Article 8 (Shipping and Air Transport) Philippines-Bahrain tax treaty BIR Ruling No. 22-96 Gulf Air Company G.S.C. Ground Floor, Don Chua Lamko Building Leviste corner H.V. dela Costa Streets Salcedo Village, Makati City Attention: Mr. Roberto A. Hukom Acting Manager (Philippines) Gentlemen : This refers to your letter dated May 7, 2004 requesting confirmation that profits derived by Gulf Air Company G.S.C. (Gulf Air) , beginning January 1, 2004, from the operation of aircraft in international traffic are subject to one and one-half percent (1 1/2%) income tax pursuant to Article 8 of the recently enforced Philippines-Bahrain tax treaty. It is represented that Gulf Air is a foreign corporation primarily engaged in the operation of aircraft in international traffic; that Gulf Air is organized and existing under the laws of Bahrain, with principal office at Building 122, Road 2403, Block 224, Muharraq Town, Bahrain (as confirmed by the relevant Registration/Renewal Certificate of a Closed Joint Stock Company issued by the Ministry of Commerce of Bahrain);that Gulf Air is licensed by the Securities and Exchange Commission to establish a branch in the Philippines that will provide international commercial air transport services to and from the Philippines and Bahrain (as confirmed by the relevant Certificate issued by the Commission on January 15, 1982);and that the branch's present address is Ground Floor, Don Chua Lamko Building, Leviste corner H.V. dela Costa Streets, Salcedo Village, Makati City, Philippines. In reply, please be informed that Article 8 of the Philippines-Bahrain tax treaty provides: "Article 8 SHIPPING AND AIR TRANSPORT "1. Profits derived by an enterprise which is a resident of 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 (1 1/2) 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. "xxx xxx xxx" Paragraph 1 states that profits derived by Gulf Air from the operation of aircraft in international traffic shall be taxable in Bahrain, the State of its residence. Paragraph 2 states that such profits derived by Gulf Air from sources in the Philippines may be taxed in the Philippines, but the tax so charged shall not exceed 1 1/2% of the gross amount of the profits, and the lowest rate of tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State (the most-favored-nation tax rate). SaTAED Accordingly, since the Philippines, as of this date, has not yet granted to a resident of a third State a most-favored-nation tax rate on profits from the operation of aircraft in international traffic, such profits derived by Gulf Air from sources in the Philippines shall be subject to tax at 1 1/2% of the gross amount of the profits. (BIR Ruling No. 22-96 dated February 22, 1996). The 1 1/2% tax shall cover profits derived by or which accrued to Gulf Air beginning January 1, 2004, the date on which the relevant Philippines-Bahrain tax treaty begins to take effect in the two countries (as confirmed by the reply letter dated December 2, 2003 of this Bureau to the Department of Foreign Affairs). The term "profits" or "revenues" as used in paragraph 2 (of Article 8) is not defined in the Philippines-Bahrain tax treaty, hence, such term shall (under paragraph 2, Article 3 (General Definitions) of the tax treaty) "have the meaning that it has at that time under the law of that State (Philippines) for the purposes of the taxes to which the Convention (tax treaty) applies." Profits or revenues from the operation of aircraft in international traffic from sources in the Philippines are described as an international air carrier's Gross Philippine Billings under Section 28(A)(3)(a) of the National Internal Revenue Code of 1997 (Tax Code), defined below: " 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 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." The computation of an international air carrier's Gross Philippine Billings is explained in detail in Revenue Regulations No. 15-02 dated May 30, 2002, which we attached herewith for your reference. Finally, aside from the 1 1/2% income tax on Gross Philippine Billings, Gulf Air is also liable to pay a tax of three percent (3%) of its quarterly gross receipts, as required under Section 118 of the Tax Code. The tax base of the 3% common carrier's tax shall be same as that for computing the Gross Philippine Billings ( Section 10, Revenue Regulations No. 15-02 ). This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service