Clarifying the VAT on sales to international air transport services
Clarifying the VAT on sales to international air transport services
always thought that the rule-making power of administrative bodies can be very
other powers, once it is abused, it can cripple one’s business at an instant.
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.
investors find themselves at the mercy of these administrative bodies
especially when the laws are vague and ambiguous.
taxation plays a vital role on the Company’s operation, investor wants tax
legislations that are clear and consistent.
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.
in point is the rule on the imposition of value-added tax (VAT) on purchases of
international airlines and shipping companies.
Act (RA) 9337specifically provided for the VAT zero-rating of the following
sale of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations.
rendered to persons engaged in international shipping or international air
transport operations, including leases of property for use thereof;
of passengers and cargo by air or sea vessels from the Philippines to a
foreign country; and
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.
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”.
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.
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
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
Intent of legislators
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.”
Ralp G. Recto clarified that it is not the vessel but the person who is VAT-
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
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.