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The perks of going online

The perks of going online by: Pamela P. Palad

Now that the April 15 tax deadline is off our backs, we can somehow relax a little bit and enjoy the sizzling hot weather brought about by the El Niño phenomenon.  For many people, this is the best time to pack their bags and travel to the many tourist destinations within and outside the country.  There is no doubt that the summer fever is definitely in full swing with thousands of vacationers traveling either to enjoy the ocean waters or to hibernate to a place with a much cooler climate.  Even the upcoming national elections have considerably contributed to the increase of travelers in the Philippines.

Through all these, it is the airline industry that primarily enjoys the peak season the most.  It has even become more aggressive in its marketing efforts to increase its revenues by offering low-fare promotions and conducting travel expos to further entice their customers. 

However, between an offline and an online international carrier, which has a better benefit in terms of tax liabilities?

An online international air carrier refers to a foreign airline corporation doing business in the Philippines having been granted landing rights in any Philippine port to perform international air transportation services/activities or flight operations and having flight operations to and from the Philippines. 

An offline carrier, on the other hand, refers to an international air carrier having no flight operations to and from the Philippines.

For online carriers, the 1997 Tax Code provides for the imposition of 2 ½ percent income tax on the Gross Philippine Billings (GPB) of international air carriers doing business in the Philippines.  GPB includes the total amount of gross revenue derived from the passage of persons, excess baggage, cargo and/or mail, originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment documents.  For offline carriers, however, Section 28 (A)(3)(a) of the 1997 Tax Code as implemented by Revenue Regulations (RR) No. 15-02, dated May 30, 2002, expressly exempts them from the tax on international air carriers.

Nevertheless, an offline international carrier selling passage documents through an independent sales agent in the Philippines is considered engaged in trade or business in the Philippines subject to the 30 percent corporate income tax imposed under Section 28(A)(1) of the 1997 Tax Code.

In a recent case promulgated by the Supreme Court (SC), it was held that although an offline carrier, which does not maintain flights to or from the Philippines, is not taxable to the 2 ½ percent tax—having no GPB as defined under Section 28 (A)(3)(a) of the 1997 Tax Code— it is not exempt from paying any income tax for its sale of passage documents in the Philippines in relation to flights for the carriage of passengers and cargo between ports or points outside the territorial jurisdiction of the Philippines. 

In this particular case, the offline carrier has a general sales agent in the Philippines who sells passage documents for compensation or commission for the offline carrier’s offline flights.  As the SC ruled, such offline international carrier should be considered as a resident foreign corporation engaged in trade or business in the Philippines subject to the 30 percent tax under Sec. 28 (A)(3) of the Tax Code.

The rule promulgated by the SC is that, if the 2 ½ percent tax on GPB under Section 28 (A)(3)(a) is applicable to a taxpayer, then the general rule imposing the 30 percent tax under Section 28 (A)(1) of the Tax Code would not apply. 

If, however, Section 28 (A)(3)(a) does not apply, a resident foreign corporation—whether an international air carrier or not—shall be liable to the 30 percent tax under Section 28 (A)(1) of the Tax Code. 

This means that an international air carrier that maintains flights to and from the Philippines shall be taxed at the rate of 2 ½ percent of its GPB, while an international air carrier that does not have flights to and from the Philippines, although exempt from 2 ½ percent tax on GPB, is subject to 30 percent tax on its income earned from its activities in the country.

Thus, the absence of flight operations to and from the Philippines is not determinative of the source of the income or the situs of income taxation.  Since passage documents are sold in the Philippines through sales agents, the offline carrier is considered a resident foreign corporation which derives revenues from the conduct of its business activity regularly pursued within the Philippines.

Based on the foregoing, the SC has clearly ruled and distinguished the tax liabilities of international air carriers.  And apparently, an online carrier, which maintains flight operations to and from the Philippines, enjoys a much lower rate of 2 ½ percent tax on GPB than the 30 percent corporate income tax liability due from offline carriers.

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at Pamela.Palad@ph.gt.com.  For other tax concerns, please check out our other tax services.