VAT Ruling No. 076-01

October 17, 2001 VAT RULING NO. 076-01 106 109 048-2000 Pacific Airways Corporation (PACIFICAIR) Domestic Airport Road MIA, Pasay City Attention: Mr. Rodolfo A. Isidro President Gentlemen : This refers to your letter dated 22 June 2001 concerning your request for a ruling on the following: (1) On importation. Whether or not the importation of aviation gas and other petroleum products by PACIFICAIR for use in its domestic operations is exempt from value added tax (VAT) and excise tax; and (2) On domestic purchases. Whether or not its domestic purchases of aviation gas and other petroleum products for use in its domestic operations is likewise exempt from VAT and excise tax. It is represented that PACIFICAIR is a domestic corporation engaged in the business of air transport services for the carriage of passengers, cargo, mail and related services in and between municipalities, cities or provinces and all points and places throughout the Philippines; and that PACIFICAIR is a legislative franchise grantee under R.A. No. 7909, Section 14 of which provides: "Sec. 14. This franchise shall not be interpreted to mean as exclusive grant of the privileges herein provided for. However, in the event any competing individual, partnership or corporation shall receive a similar permit or franchise with terms and/or provisions more favorable than those herein granted or which tend to place the grantee herein at any disadvantage, then such terms and/or provisions shall ipso facto become part hereof and shall operate equally in favor of the grantee herein." That the Philippine Airlines, Inc. (PAL) is also a domestic corporation; that, it is likewise a grantee of a legislative franchise; that Section 13 of its franchise, as amended by Presidential Decree No. 1590, provides: "Sec. 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine government during the life of this franchise, whichever of subsections (a) and (b) hereunder will result in a lower tax: "(a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the NationalInternal RevenueCode; or "(b) A franchise tax of two percent (2%) of the gross revenues derived by the grantee from all sources, without distinction as to transport or non-transport operation, provided, that with respect to international air-transport service, only the gross passenger, mail, and freights revenues from its outgoing flights shall be subject to this tax. "The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency, now or in the future. . . ." In reply, please be informed as follows: (1) On importation . Whether or not the importation of aviation gas and other petroleum products by PACIFICAIR for use in its domestic operations is exempt from value-added tax (VAT) and excise tax . Please be informed that the legislative franchise of PAL, as amended, had been further amended by Presidential Decree No. 1590 and by Letter of Instruction (LOI) No. 1483 of the President of the Philippines. Pursuant thereto, it was held in BIR Ruling No. 013-99, dated 29 January 1999, that PAL's importation of aviation gas, fuel and oil is exempt from taxation. However, its exemption from indirect tax on its purchase of domestic petroleum products had been withdrawn, as follows: ". . . Sec. 13(b) Par. 1 and 2 of P.D.No.1590, provides among others, that purchases by PAL of aviation gas, fuel and oil to be used in its transport and non-transport operations are exempt from the payment of all taxes, duties, charges, royalties or fees; that since then, PAL had been enjoying this tax-exemption privileges until the same was withdrawn partially when LOINo.1483 was issued by the President of the Philippines, the main text of which is quoted as follows: HAaScT '. . . the tax exemption privilege granted to PAL on its purchase of domestic petroleum products for use in its domestic operations is hereby withdrawn . ' (emphasis supplied) That the wordings of LOINo.1483 is very clear that the tax-exemption privilege being withdrawn refers specifically to the purchase of domestic petroleum products by PAL for use in its domestic operations; that it does not include purchases from abroad or foreign countries; and that it is for this reason that the Bureau of Customs does not impose any tax or customs duties on arrivals of petroleum products imported or purchased by PAL from abroad. ". . . we confirm your opinion that petroleum products purchased or imported by PAL from abroad can be used by it in its domestic operations without payment of tax since the said products were not a domestic purchase. The intention of LOINo.1483 is to impose a tax on domestic petroleum products purchased by PAL for use in its domestic operations. "Furthermore, the grant of such exemption is not contrary to Executive OrderNo.93, withdrawing the tax and duty exemption privileges, including the preferential tax treatment of all units of government and private entities in view of Sec. 24 of P.D.No.1590 which provides, viz: 'SEC. 24. This franchise, as amended, or any section or provision thereof may only be modified, amended, or repealed expressly by a special law or decree that shall specifically modify, amend, or repeal this franchise or any section or provision thereof ' (emphasis supplied) "The foregoing finds support in the letter of then Executive Secretary Catalino Macaraig, Jr. of the Office of the President of the Philippines dated March 30, 1988 addressed to the President of Philippines Airlines which ruled that: '. . . this Office finds and so declares that E.O. Nos.72 and 93, both series of 1985, have not effectively amended or modified any provision or section P.D.No.1590.' (emphasis supplied) "Moreover, Aurora T. Aquino, Director IV of the Office of the President of the Philippines issued an undated certification that: '. . . according to the records available on file on this Office, PresidentialDecree No.1590 dated June 11, 1978, entitled 'AN ACTGRANTING A NEW FRANCHISE TO PHILIPPINEAIRLINES, INC. TO ESTABLISH, OPERATE, AND MAINTAIN AIRTRANSPORT SERVICES IN THE PHILIPPINES AND BETWEEN THE PHILIPPINES AND OTHER COUNTRIES' has not been amended nor revoked by any issuance.' "Finally, the Department of Finance through Director Vicente G. Quintos, Head, Fiscal Incentives Review Board (FIRB) Secretariat in his letter dated May 5, 1992 addressed to Mr. Fortunato Gupit, Jr., Vice President General Counsel, Philippine Airlines in reference to the aforequoted letter-ruling of the Office of the President through then Executive Secretary Catalino Macaraig, Jr., dated March 30, 1998, stated that: '. . . the FIRB is in agreement with the aforecited position of the Office of the President.'" Accordingly, PAL's importation of the aforesaid petroleum products shall be exempt from VAT and excise tax.. However, with respect to PAL's local purchases, it is not exempt from VAT and/or excise tax indirectly passed on by its domestic suppliers of the said petroleum products. Cebu Air, Inc. (CAI), a domestic corporation also engaged in air transportation business, and likewise a legislative franchise grantee under R.A. No. 7151, invoked the aforesaid tax exemption privilege of PAL, in connection with CAI's importation of petroleum products, considering the ipso facto provision under Sec. 11 of CAI's franchise, as follows: "SEC. 11. Tax Provisions . The grantee shall pay to the Philippine Government during the life of this franchise tax of five percent (5%) of the gross revenues derived by the grantee from transport operations. "In the event that any competing individual, partnership or corporation receives and enjoys tax privileges and other favorable terms which tend to place the herein grantee at any disadvantage, then such provisions shall be deemed ipso facto part hereof and shall operate equally in favor of the grantee. "The grantee shall, however, be subject to income tax levied under Title II of the NationalInternal RevenueCode, as amended, and tax on its real property under existing laws on revenue earned from activities other than air transportation." In BIR Ruling No. 110-99, dated 20 July 1999, CAI's importation of the said petroleum products was held equally exempt from taxation pursuant to the ipso facto provision of its franchise, in relation to PAL's franchise. But this ruling was revoked by BIR Ruling No. 013-2000, dated 07 January 2000. However, CAI petitioned the Secretary of Finance for a reconsideration of the said revocation. Pursuant to Section 4, National Internal Revenue Code (NIRC) of 1997, the Secretary of Finance, in his letter-decision dated 28 June 2000, revoked BIR Ruling No. 013-2000, and reinstated BIR Ruling No. 110-99, as follows: "On the basis of the foregoing, BIR RulingNo.013-2000 is hereby revoked. BIR RulingNo.110-99, which provides for CAI's exemption from all taxes imposed by the NIRC on its importation or purchases of petroleum products from abroad for use in its domestic operations, is hereby reinstated. "In the interest of a level playing field, this ruling shall also apply to other airlines similarly situated." In BIR Ruling No. 048-2000, dated 23 October 2000, in the case of AIR PHILIPPINES CORPORATION, it was held that, in view of the ipso facto provision of its legislative franchise, its importation of petroleum products is likewise exempt from taxation pursuant to the aforesaid letter-decision of the Secretary of Finance. In view of the foregoing, PACIFICAIR's importation of the said petroleum products for use in its air transportation business is likewise exempt from taxation. It should be noted, however, that this ruling is based solely on the existing rulings on the matter, as discussed above, and the representations made therein. (2) On domestic purchases . Whether or not its domestic purchases of aviation gas and other petroleum products for use in its domestic operations is likewise exempt from VAT and excise tax. Please be informed that the value-added tax is a tax on the supplier of goods, property or services. (See Sec. 105, NIRC of 1997). On the other hand, excise tax is a tax on certain goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to certain things imported. (See Sec. 129, id.). If locally manufactured or produced, the tax is imposed on the manufacturer/producer. (See Sec. 130, id.). If imported, the tax is imposed on the importer (See Section 131, id.). Since these taxes are in the nature of " indirect taxes ," the same are indirectly passed on by the supplier-seller, to the buyer. In the hands of the buyer, an indirect tax loses the character of a tax. Thus, in BIR Ruling No. 233-81, dated 18 November 1981, citing the Court's decision in the case of Phil. Acetylene Co., it was held: "Moreover, in the case of the PhilippineAcetyleneCo. vs.Commissioner of Internal Revenue, G.R. No. L-19707, August 17, 1967, the Supreme Court said: 'Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction with the use of the phrase 'pass the tax on.' Writing the opinion of the U.S. Supreme Court in Lash's Products v. United States, he said: The phrase 'passed the tax on' is inaccurate, as obviously the tax is laid and remains on the manufacturer and on him alone. The purchaser does not really pay the tax. He pays or may pay the seller more for the goods because of the seller's obligation, but that is all . . . The price is the sum total paid for the goods. The amount added because of the tax is paid to get the goods and for nothing else. Therefore, it is part of the price. . . . ' (Philippine Acetylene Co. vs. Commissioner, G.R. No. L-19707, August 17, 1967) "Following the above pronouncement, it can be stated that the fee or consideration agreed upon between the contractor and his customers is the total amount paid for the services to be rendered by the former to the latter. The amount added because of the contractor's tax is part of said consideration. Consequently, in the final analysis, since the consideration is fixed by the parties, the tax is passed on by the contractor to the customer with the consent of the latter." Since it is not a tax in the hands of PACIFICAIR, it cannot legally invoke its tax exemption privilege under its legislative franchise. It cannot also invoke the ipso facto provision of its franchise, in relation to PAL's legislative franchise, since PAL does not also enjoy exemption from indirect tax on its purchases of domestic petroleum products for use in its domestic operations. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group