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Clarifying the VAT on sales to international air transport services

Clarifying the VAT on sales to international air transport services

I’ve always thought that the rule-making power of administrative bodies can be very powerful.

Like any other powers, once it is abused, it can cripple one’s business at an instant.

This kind of abuse is not far from reality. We heard many stories of investors who relocate to other countries simply because the tax incentives they previously enjoyed vanished due to the mere issuance of administrative regulations, rulings or circulars. We also see rulings that contradict previous ruling.

Oftentimes, investors find themselves at the mercy of these administrative bodies especially when the laws are vague and ambiguous.

As taxation plays a vital role on the Company’s operation, investor wants tax legislations that are clear and consistent.

Vague laws and ambiguous rules as well as legislations that invite inconsistent interpretation can bring business problem in the future and may discourage investors to retain their business in the county.

As case in point is the rule on the imposition of value-added tax (VAT) on purchases of international airlines and shipping companies.

Republic Act (RA) 9337specifically provided for the VAT zero-rating of the following transactions:

       - The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations.

       - Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof;

       -  Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; and

In BIR Ruling DA (VAT-003) 016-2010 issued last January 28, 2010, a hotel operator requested the Bureau of Internal Revenue to rule on the correct VAT treatment of hotel services such as room accommodation and food and beverage service rendered to person engaged in international air transport operations. 

The international airlines refused to pay the VAT on the ground that sales of service to persons engaged in international air transport operation is zero rated pursuant to Sec 108 (B) (4) of the Tax Code as amended by Republic Act (RA) 9337.

The BIR ruled that such services are subject to 12% VAT pursuant to Revenue Memorandum Circular 046-08 dated February 1, 2008 which states that the VAT zero-rating “is limited to goods, supplies, equipment, fuel and services pertaining to or attributable to the transport of goods and passenger from a port in the Philippines directly to a foreign port without docking or stopping at any other port in the Philippines to unload passengers and/or cargoes loaded in and from another domestic port”.

Based on the foregoing, the BIR held that as hotel services were rendered in their premises, such services have no direct connection with the transport of goods and passenger, and as such, they cannot be considered as services directly attributable to the transport of goods and passenger from the Philippine port directly to a foreign port. 

However, this particular BIR ruling is contrary with the BIR Ruling DA-(VAT-057) 552-08 issued on December 18, 2008 where similar hotel services rendered to the international airline's cabin and cockpit crew, technical/support personnel, as well as, passengers during flight interruptions are subject to VAT at zero (0%) percent rate.

These contradictory rulings of the BIR create confusion to international airlines and hotels operating in the Philippines.

In the 2010 ruling, the BIR  simply reiterated its position in VAT Ruling No. 021-01 dated May 15, 2010 on services rendered to international vessel.  I believe that the BIR may have overlooked that, under the new VAT law, transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country is already specifically subject to 0% VAT.  Hence, they will not have any use for the input taxes which justifies the zero-rating on their purchases of goods and services.

Administrative regulations enacted by administrative bodies to interpret law have the force of law and are entitle to great respect and have in their favor the presumption of legality.

However, administrative agencies are not authorized to substitute their own judgment for any applicable law or regulations with the wisdom or propriety of which they do not agree on or at least not before such law or regulation is set aside by the court as unconstitutional or illegal.  

RR No. 16-2005 as amended by RR No.4 -2007, did not enumerate what type of services must be rendered to person engaged in international air transport operation to qualify to zero percent (0%)  VAT rate.

What was clearly provided is that these services must not be relative to the transport of passenger, goods or cargoes from one place in the Philippines to another place in the Philippines.

Moreover, , the international airlines can also argue that in as much as the personnel, flight attendants, crews and passengers are main parcel of their air transport operation, any services rendered to the latter are services attributable to the transport of goods and passenger pursuant to RMC 046-08.

Intent of legislators

It is also noteworthy to mention that in Senate journal of Senate Bill 1950 of the Thirteenth Congress, Session No. 1 dated March 30, 31, & April 1, 2005, Sen. Madrigal questioned why the term “service to vessel” would be changed to “services rendered to persons.” 

Sen. Ralp G. Recto clarified that it is not the vessel but the person who is VAT- registered.

It is elementary rule of statutory construction to ascertain, and if possible to give effect to the intention and purpose of the Legislature as expressed in the statute.

Considering that the Legislature intended to subject to VAT not the property itself (vessel/aircraft)  but the person engaged international air transport operation, we can aver that VAT ruling No. 021-01 has been rendered moot and academic. 

In addition, Sen. Recto also clarified that the change of the term does not mean that all services rendered to a person engaged in international transport are zero-rated. He stated that only services directly used in connection with overseas shipping or international air operation are zero-rated.  

Now, that begs the question whether indeed hotel services like providing for living/sleeping quarters, food and hotel facilities, land transport services and other services rendered to the international airline's cabin and cockpit crew, technical and support personnel, as well as, passengers during flight interruptions are services directly used in connection with international air transportation.

Interpretative regulations such as BIR ruling, circulars, memorandums are issued as an incident of administrative body’s power to enforce the law and to clarify the provisions of the law for proper observance of the people. They have the validity in the judicial proceeding only to the extent that they correctly construe the statute. Hence, this kind of regulation is merely permissive and received by the court with much respect but not finality.

Hence, the interpretation in the instant BIR rulings and RMC 046-08 are “at best advisory” for it is the court that finally determines what the law means.

Nonetheless, it is only when the validity of these particular BIR rulings and RMC is challenged and  such challenge is sustained by the court can these international airlines have such right to refuse payment of  the twelve percent VAT on hotel services rendered to them.  

All told, this kind predicament of international airline and hotels could have been avoided if the laws and the regulations were applied according to their letter and intent to avoid tax uncertainties. As the Philippines gears to be a globally-competitive country, legislators and administrative agencies must ensure that the existing laws are adequate to address the emerging needs of any industry.

It is only when these laws and regulations are implemented uniformly and consistently that we can gain the investors’ confidence on the business climate of the country.