VAT Ruling No. 003-04

February 13, 2004 VAT RULING NO. 003-04 Secs. 28 & 108 (B) (2) & (4) 000-00 Baniqued & Baniqued, Attorney at Law Suite 803, 8th Floor Jollibee Centre San Miguel Avenue Ortigas Center, Pasig City Attention: Attys. Carlos G. Baniqued & Terence Conrad H. Bello Gentlemen : This refers to your letters dated November 4, 1999, and January 31, 2000, requesting, in behalf of your client, Aerotel Ltd., Corporation (Aerotel) , confirmation of your opinions, namely: (a) That an off-line international air carrier, which has no flight operations to and from the Philippines, is not deemed engaged in business as a common carrier in the Philippines by reason merely of its entering into a contract with a general sales agent (GSA) in the Philippines for the purpose of selling passage documents covering its off-line flights; and, hence, said off-line carrier is not subject to the 2-% tax on Gross Philippine Billings imposed by Section 28(A)(3) of the National Internal Revenue Code (NIRC) of 1997; (b) That the services performed by Aerotel as GSA for various international air carriers, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP), is subject to zero percent (0%) value-added tax (VAT) pursuant to Section 108(B)(2) of the NIRC of 1997; (c) That the commissions earned by Aerotel which are offset against the remittable revenues collected by the same in behalf of its principals are deemed inwardly remitted and, hence, may qualify for VAT zero-rating; and (d) That, therefore, such services performed by Aerotel as GSA for its foreign principals are deemed automatically zero-rated even without an approved application therefor. It is represented that Aerotel is a domestic corporation and a VAT-registered person, which acts as the GSA for the following international air carriers (hereinafter referred to collectively as "Principals") pursuant to various general sales agency agreements: (a) South African Airways a nonresident foreign corporation, organized and existing under the laws of the Republic of South Africa, and an off-line international carrier maintaining flight operations for the carriage of passengers and cargo between ports or points outside the territorial jurisdiction of the Philippines; (b) Air New Zealand Limited a nonresident foreign corporation, organized and existing under the laws of New Zealand, and an off-line international carrier maintaining flight operations for the carriage of passengers and cargo between ports or points outside the territorial jurisdiction of the Philippines; (c) Air Canada a nonresident foreign corporation, organized and existing under the laws of Canada, and an off-line international carrier maintaining flight operations for the carriage of passengers and cargo between ports or points outside the territorial jurisdiction of the Philippines; (d) Ansett Australia Limited a nonresident foreign corporation, organized and existing under the laws of Australia, and an off-line international carrier maintaining flight operations for the carriage of passengers and cargo between ports or points outside the territorial jurisdiction of the Philippines; (e) United Air Lines, Inc. a nonresident foreign corporation, organized and existing under the laws of the State of Delaware, USA, and which maintains on-line flights for the carriage of cargo and off-line flights for the carriage of passengers; and (f) Martinair Holland N.V. a nonresident foreign corporation, organized and existing under the laws of the Netherlands, and an off-line international carrier maintaining flight operations for the carriage of passengers and cargo between ports or points outside the territorial jurisdiction of the Philippines; that the Principals provide international air transportation of passengers and cargo, and, for this purpose, have appointed Aerotel as their GSA in the Philippines; that as such Aerotel promotes and solicits the sale of airway bills and air tickets on behalf of said Principals; that the commissions earned by Aerotel therefrom are paid for in accordance with the rules and regulations of the BSP; and that, however, in certain instances, the said commissions are instead offset against the remittable revenues collected by Aerotel in behalf of the Principals. IcAaSD In reply, please be informed that pursuant to Section 28(A)(3) of the NIRC of 1997, an international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2-%) on its Gross Philippine Billings, which 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. Therefore, your opinions that an off-line international air carrier, which has no flight operations to and from the Philippines, is not deemed engaged in business as a common carrier in the Philippines by reason merely of its entering into a contract with a GSA therein for the purpose of selling passage documents covering its off-line flights; and that, hence, said off-line carrier is not subject to the 2-% tax on Gross Philippine Billings imposed by Section 28(A)(3) of the NIRC of 1997, are hereby confirmed. However, United Air Lines, Inc., as heretofore mentioned, shall be subject to the 2-% tax on its gross revenues derived from on-line flights for the carriage of cargo. Please be informed, further, that Section 4.102-2(b) of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97, expounds on the transactions referred to in Section 108(B)(2) of the NIRC of 1997 as those "services other than processing, manufacturing or repacking for other persons doing business outside the Philippines of goods which are subsequently exported, as well as services by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP". The services performed by Aerotel as GSA for the various international air carriers, as heretofore explained, does not fall squarely within the ambit of the said provisions even if they are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; hence, the same are subject to the ten percent (10%) VAT based on the gross receipts therefrom. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue