“The plight of foreign flights” by Romulo S. Danao (September 12, 2011)

SUITS THE C-SUITE By Romulo S. Danao, Jr.
Business World (09/12/2011)

Of late, the Bureau of Internal Revenue (BIR) has been releasing many issuances, some of which are of general application, while others are specific to certain industries.

One such issuance significantly affects international airlines.

Just last month, the BIR issued Revenue Memorandum Circular (RMC) No. 31-2011, revoking a 2008 ruling which declared that sales of services by hotels to international airlines are subject to 0% value-added tax (VAT).

This RMC reiterates the BIR position in a ruling issued in April 2011 that hotel services provided to international air carriers are subject to 12% VAT and are not otherwise VAT zero-rated.

Another issuance with direct impact on the operations of foreign airlines is Revenue Regulations (RR) No. 11-2011 issued in July 2011.

This one redefines the tax base of the 3% Common Carrier’s Tax (CCT) imposed on international carriers.

Before RR 11-2011, the tax base for computing CCT was the same as the tax base for computing the 2.5% Gross Philippine Billings Tax (GPBT), which is a special form of income tax to which foreign airlines are subject.

While GPBT is an income tax, the CCT is a percentage tax.

Under the Tax Code, GPBT is based on “Gross Philippine Billings (GPB)” of foreign airlines, while CCT is based on the “Gross Receipts.”

GPB is defined in Section 28 (A) (3) (a) of the Tax Code as 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, regardless of where the ticket or passage document is issued or paid.

Tickets revalidated, exchanged or endorsed to another international airline form part of the GPB if the passenger boards the carrier from the Philippines.

If a flight originates from the Philippines but transshipment of the passenger takes place outside the Philippines on another airline, only the cost of the ticket corresponding to the portion flown from the Philippines to the point of transshipment comprises the GPB.

In RR 15-2002, which amplified the Tax Code definition of GPB, BIR used the “average method” for determining the GPB from carriage of passengers.

This is determined by computing the monthly average net fare of all the tax coupons of plane tickets issued for the month per point of final destination, per class of passage (i.e., first class, business class or economy class) and per classification of passenger (i.e., adult, child or infant), and then multiplied by the corresponding number of passengers flown for the month.

This method of computing GPB recognizes the unique operations of international airlines where it is difficult, if not impossible, to determine the actual revenue attributable to the Philippine operations given that ticket prices are volatile.

Furthermore, if the ticket price covers multiple flights, it is difficult to allocate the revenue attributable to the outgoing Philippine portion.

While the Tax Code defines GPB, it does not define “gross receipts” for CCT purposes.

RR 15-2002 simply provided that the tax base of CCT shall be the same as the tax base of GPBT.

With the recent amendment introduced by RR 11-2011, the BIR now provides a definition of “gross receipts” for CCT purposes which is practically a duplicate of the Tax Code definition of GPB.

However, the tax base will now include the rental fees, penalties, deposits applied as payments, advance payments and other service charges and fees, aside from ticket price, excess baggage fees, cargo fees and mail fees.

Likewise, BIR abandoned the average method of determining gross receipts for purposes of CCT, as the amendment specifically provides that the gross receipts subject to CCT are those that are “actually or constructively received” during the taxable quarter.

Other than the above-mentioned differences, the amendment adopted the Tax Code’s definition of GPB, particularly with regard to rules on flight originating from the Philippines, tickets revalidated, exchanged or indorsed to another international airline and transshipment of passengers.

This means that not all money received by a foreign airline will be subject to CCT.

Gross receipts must be derived from passage of persons, excess baggage, cargo and mail originating from the Philippines, and the tax covers only the portion flown from the Philippines to the point where the passenger transfers to another carrier.

With the amendment, BIR is applying “actual or constructive receipt” for CCT purposes while retaining the “average method” for computing GPB from carriage of passengers.

This is probably to address the fact that CCT, as a percentage tax, should be based on gross receipts while GPBT, as an income tax, should be based on gross billings or revenue.

It is within the power of BIR to interpret and enforce the provisions of our tax law.

But in the case at hand, the unique business operations of international airlines must also be considered.

There are questions that need to be addressed.

For instance, how would “actual or constructive receipt” be determined, particularly for lump sum ticket prices covering multiple flights to several destinations when only the outgoing Philippine portion of the flight is taxable?

Also, how would the price for a round-trip ticket be allocated for the outgoing flight? Should it simply be divided by two when a one-way ticket price for the same outgoing flight costs much higher?

Given these issues and the fact that air transport has become popular and affordable to more travelers, BIR should issue clarifications on the recent amendment to avoid or mitigate any confusion both on the part of the tax authorities and taxpayers.

(Romulo S. Danao, Jr. is a Partner of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.