REVENUE MEMORANDUM CIRCULAR NO.

46-2008 Clarification of Issues Concerning Common Carriers by Air and Their Agents Relative to the Revenue and receipt from Transport of Passengers, Good/Cargoes and Mail, and from Excess Baggage I. BACKGROUND This revenue Memorandum Circular is issued to clarify certain provisions of the Code, as it applies to Air Transport Operators and their various Travel Agents as herein defined, as well as, their suppliers. To ensure that the law is properly implemented and Taxes are properly collected, in a manner consistent with acceptable business practices. DEFINITION OF TERMS 1. Common Carriers refers to individuals, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by Land Water, or Air For compensation, offering their services to the public and shall include transportation contractors. 2. Gross Receipts shall refer to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding VAT, 2. Gross Receipts but shall not include: Amount earmarked for the remittance to a third party as agreed in an implied or express contract or mandated by law and Invoiced/receipted by such third party directly to the real customer or actual recipient of the service.

II.

For common carriers by air Is the amount actually or constructively received as compensation for their services of undertaking the contract of carriage by air. a. International Air Carrier Shall refer 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 from the Philippines to anywhere in the world and vice versa, in the case of on-line carrier. Or Having maintained business establishment, agent or representative office in the Philippines for the sale of its own tickets/ passage documents or tickets/passage documents of other airline companies, which airline companies operate without touching any Philippine port, in the case of off-line carrier. International air carrier includes both off-line carrier and online carrier. b. Automated Ticketing System Refers to an automated process which comprises the equipment, programs and procedures which allows access to airline data stored in a Customer Reservation System (CRS) or airline reservation system for the automated issuance of Standard Traffic Documents. c. Electronic Ticketing Refers to a method utilized to document the sale of passenger transportation services (electronic ticket) and other related services (electronic miscellaneous documents) without requiring the issuance of paper value documents. d. Travel Agents Shall refer to International Air Transport Associations (IATAs) duly accredited travel agents who are authorized to issue in the Philippines tickets of: o On-line and o Off-line international air carriers. e. IATA Cargo Accounts Settlement System (CASS) Cargo Agents Shall refer to IATAs duly accredited cargo agents who are authorized to issue in the Philippines Cargo airway bills/ passage documents of on-line international air carriers. f. General Sales Agent (GSA) Shall refer to travel agents that deal exclusively for and behalf of

o A domestic carrier; or o An on-line international air carrier, or o An off-line international carriers, and earn commission income for their services. g. Refund Refers to the repayment to the purchaser of all or a portion of a fare rate or charge for unused carriage or service. Q-1: What kinds of common carriers are subject to 10% VAT rate effective November 1, 2005, and to 12% VAT rate effective February 1, 2006 under Republic Act (RA) No. 9337? Answer A-1. Domestic common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines are now subject to 12% VAT, o MNL CEB MNL But with respect to transport of passengers, goods and cargoes from the Philippines to any foreign port, the same is subject to VAT at zero-rate (0%) o MNL HKG MNL Domestic common carriers which transport goods and cargoes by Land, however, are already covered by VAT even prior to R.A. 9337.

3% percentage tax/common carriers tax Common carriers by land with respect to their gross receipts from the transport of passengers including: o Operators of taxicabs o Utility cars for rent or hire driven by the lessees and o Tourist buses used for the transport of passengers shall continue to be subject to the 3% percentage tax/common carriers tax imposed under Section 117 of the code, but shall not be liable for VAT. On-line international common carriers by air and sea shall continue to be subject to the 3% common carriers tax under Section 118 of the Code. Q-2: What transactions of domestic air carriers are subject to 12% VAT? A-2: Transport of passengers, good or cargoes from one place in the Philippines to another place in the Philippines is subject to 12% VAT. Gross receipts derived from transactions incidental to the main operations shall likewise be subject to 12% VAT.

Q-3: Are on-line international air carriers subject to VAT? A-3: No. On-line international air carriers (international air carriers that touch any port in the Philippines as part of their carriage operation) are exempt from VAT. They are liable to the three percent (3%) percentage tax on their gross receipts from outbound fares and freight, pursuant to Section 118 of the Code. Q-4 What about domestic air carriers engaged in both domestic and international transport operations, are they subject to VAT on both operations? No. Domestic air carriers are subject to VAT only on their services performed within the Philippines. The 12% VAT shall apply to their income derived from domestic operations as mentioned under A-2 above. However, their international transport operations involve both services performed within the Philippines and services performed without. Their income from services involving the transport of passengers, goods and cargoes from the Philippines to a foreign country are derived from within but subject to zero-rate VAT pursuant to Section 108(8) of the Tax Code. On the other hand, their income from international transport operations involving the transport of passengers, goods and cargoes from a foreign country to the Philippines are income derived from services rendered outside the Philippines, hence, exempt from business taxes (including the VAT), due to lack of tax jurisdiction. Q-5 In the case of transport by a domestic air carrier (engaged in both domestic and foreign operations) of passengers and/or cargoes from domestic port to a foreign port but passing through another domestic port to load additional passengers and/or cargoes bound for foreign destination, will the entire journey be subject to a zero rate VAT? A-5: Yes, the receipts from the entire journey from a domestic port to a foreign port shall be subject to zero rate VAT. However, if before proceeding to the foreign port the carrier loads passengers and/or cargoes from a domestic port and unloads them in another domestic port, the gross receipts therefrom (domestic port to another domestic port) shall be subject to 12% VAT. Manila Cebu Hongkong

Q-6 Can on-line international air carriers opt to be under the VAT system and be subject to VAT at zero rate on their outbound international operations similar to domestic air carriers registered as domestic corporations? A-6: No. The business of an international air carriers is exempt from VAT because it is a sale of services subject to percentage tax. Is the main business is exempt from VAT, the VAT exempt person can not elect that the said exempt business/es be placed under the VAT

system. The option to be subject to VAT on its exempt transactions is available only to a VAT registered person pursuant to Section 109(2) of the Code, as amended by R.A. 9337. Q-7: Are domestic air carriers with international operations considered an international carriers and be subject to the 3% percentage tax under Sec. 118 instead of zero rate VAT? A-7: No. As defined, international air carrier refers to foreign airline companies only and does not include domestic airline corporations with international operation.

Q-8: Will air carriers operating under a government franchise still be required to pay the franchise tax in addition to the VAT? A-8: No. The VAT is in lieu of the franchise tax.

Q-15: Who among the air transport operators are required to register as VAT taxpayer effective November 1, 2005? A-15: Domestic air carriers with respect to their air transport operations, whose gross receipts from the transport of passengers, goods and cargoes for any 12-month period exceed P1,500,000.00 are required to register as VAT taxpayers.

Q-16: Can passenger or cargo tickets issued (whether manual or automated) for domestic or international flight/voyage substitute as VAT official receipts? No. VAT-registered domestic air carriers are required to issue VAT official receipt on their sale of passenger or cargo tickets for both domestic and international flight/voyage. Airline/Vessel tickets are considered contracts of carriage and cannot serve as official receipts. VAT official receipts shall be issued by the domestic air carrier upon receipt, actual or constructive, of payments from the purchasers.

Q-16: Can passenger or cargo tickets issued (whether manual or automated) for domestic or international flight/voyage substitute as VAT official receipts? In the case of tickets sold through agents (general sales agents or travel agents) of domestic air carriers the agents shall issue the VAT official receipts of the domestic air carriers (not the agents own official receipts), since the seller of tickets are the domestic air carriers and not their agents. The agents merely collect the proceeds of sale from the buyers on behalf of the of the domestic air carriers. In order to comply with

this procedure, the domestic carriers shall maintain an adequate supply of VAT official receipts with their agents. Q-16: Can passenger or cargo tickets issued (whether manual or automated) for domestic or international flight/voyage substitute as VAT official receipts? The agents shall, in turn, bill the domestic air carriers for their commissions and the 12% VAT on said commission, if the agents are VAT registered or VAT registrable taxpayers. The VAT official receipts issued by the agents to the domestic air carriers shall be the bases of the latter in claiming input taxes on commission paid to agents.

Q-16: Can passenger or cargo tickets issued (whether manual or automated) for domestic or international flight/voyage substitute as VAT official receipts? On the other hand, if the agent is a qualified non-VAT taxpayers, he shall issue non-VAT official receipt to the domestic carriers. However, said non-VAT receipt issued by the agent to the domestic common carrier cannot generate input tax to the latter. On the other hand, if the intermediary-entity between the carrier and the customer purchases in bulk passenger spaces or cargo spaces and resells the same to the said customer at a price dictated by said intermediary as evidenced by the issuance of the intermediarys official receipt and sales invoice/billing statement, a wholesalerdistributor/retailer relationship is created between the carrier and the intermediary and they shall be taxed accordingly.

Q-17: If the purchaser of the domestic air tickets refuses to voluntarily disclose the information that he is a VAT-registered person, will the seller of the domestic ticket be liable for non-indication in the official receipt of the required information prescribed under Sec 113(a) an Sec. 237 of the Code? If the purchaser is a regular customer, the seller has no valid excuse for not knowing whether the purchaser is VAT-registered or not. As such, it shall be liable for any commission of the prescribed information in the receipt to be issued. However, for non-regular customers, the seller will not be held liable for such commissions. Official receipt issued to VAT-registered purchasers that do not reflect the information prescribed under Sections 237 and 113 of the Code will not be allowed as sources of input tax credits on the part of the VAT registered purchasers.

Q-18: How about domestic air tickets sold through electronic ticketing where no paper value documents are issued, what will serve as VAT receipt?

The domestic air carrier should provide for a facility to allow the buyer to download the information contained in the airline ticket electronically stored in its computer system and to generate / print an official receipt which shall reflect the information required under Section 113 and Section 237 of the Code. This particular situation presupposes that the air carrier has a BIRapproved computerized accounting system or components thereof that includes the system that allows the issuance of computer-generated VAT official receipt. In the absence of such facility, a manual VAT official receipt that complies with the requirements under Sections237 an 113 of the Code shall be issued by the domestic air carrier which shall be the basis of the VAT-registered buyer in claiming input tax on his purchase of carriage service.

Q-19: What is the basis of the 12% Vat on the commission of general sales agents (GSA) with respect to their sales of domestic air tickets? Proceeds on the sale of domestic air tickets do not form part of the gross receipts of the general sales agent. The same forms part of the gross receipts of the domestic airline company. The gross receipts of agents shall pertain to their commission only which is included in the price of airline tickets. The price of the airline ticket (inclusive of Civil Aeronautics Board (CAB) approved airfare, fuel surcharge, insurance surcharge, aviation security fee, terminal fee, etc.) plus the 12% VAT passed on by the domestic air carrier (seller) to the buyer shall be collected by the agent on behalf of the domestic air carriers. The agent shall remit to the carrier the following: o The price of the airline tickets (less the agents commission) o The 12% VAT (less the VAT accruing on the agents commission); and o The 10% creditable withholding of income tax on agents commission. o The price of the airline tickets (less the agents commission) o The 12% VAT o The 10% creditable withholding of income tax on agents commission Example: PAL sold domestic airline ticket at P1,000.00 through its general sales agent (agents commission is 3.5%). Shown herein below is the computation Top 10,000 Corporation Buyer Others

Price of airline ticket Add: 12% VAT Sub-Total Less: 2% withholding tax Total amount collected from buyer Less: Agents commission 12% VAT on commission Sub Total Add: 10% Withholding of income tax on Agents commission Amount to be remitted by the agent to PAL

P1,000.00 120.00 P1,120.00 (20.00) P1,100.00 (35.00) (4.20) P1,060.80 3.50 P1,064.30

P1,000.00 120.00 P1,120.00 P1,120.00 (35.00) (4.20) P1,080.80 3.50 P1,084.30

The agent shall remit to the BIR the 12% VAT accruing on its commission, net of input taxes incurred by the agent. For buyers classified as belonging to the Top Twenty Thousand (10,000) private corporations/ Top 5,000 Individuals, they have to deduct and withhold 2% on their payments for domestic air tickets and issue a Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in the name of the domestic air carrier as the income recipient. The latter shall in turn issue BIR Form 2307 to the agent for the 10% creditable withholding tax withheld from the agents commission in the name of the agent as the income recipient of the commission.

If the domestic airline ticket was sold by a sub-agent of the general sales agent (GSA) of a domestic air carrier, the amount to be remitted by the sub-agent to the GSA will depend on whether the sub-agent is VAT registered or not as illustrated below: VAT registered Sub Agent Total amount collected from buyer (inclusive of 12% VAT) Less: Sub Agents commission (2%) 12% VAT on commission Sub Total Add: 10% w/ Tax on Sub Agents Commission Amount to be remitted to GSA P1,120.00 (20.00) (2.40) P1,097.60 2.00 P1,099.60 Non-VAT registered Sub Agent P1,120.00 (20.00) P1,100.00 2.00 P1,102.00

The GSA shall issue BIR Form 2307 to the sub agent for the 10% creditable withholding tax on the sub agents commission. Sub agents of GSA shall present proofs of their BIR registration (whether VAT or non-VAT) to the GSA for verification purposes.

For the commission and the corresponding output VAT on commission withheld by the GSA/sub-agents from remittances to the domestic air carriers/GSA, the GSA/sub-agents shall issue a receipt (be it a NonVAT receipt, if the agent is non-VAT registered or a VAT-receipt, if the agent is VAT-registered ) to the domestic air carriers/ GSA. The amount deducted from the remittable amount to the domestic air carriers/GSA shall be net of the creditable withholding of income tax on the agent/ sub agents commission which should be remitted by the domestic air carrier/GSA to the BIR. The VAT official receipt issued by the GSA/Sub Agents shall be the basis for the domestic air carriers/GSA in claiming input taxes on the commission.

Q-20: Will a non-VAT registered agent be liable for VAT as a result of the 12% VAT passed on to buyers of domestic airline ticket? No. The 12% VAT on the sale of domestic airline ticket is passed on to the buyer by the seller which is the domestic air carriers. The agent collects the payment for the domestic airline ticket plus the 12% VAT on behalf of the domestic air carrier. The non-VAT registered ticket agent shall be liable for three percent (3%) tax on his gross receipts of commission pursuant to Sec 116 of the Code, provided his gross annual receipts do not exceed P1,500,000. The non-VAT registered agent shall issue non-VAT receipt to the domestic air carrier which is the agents real customer, which nonVAT receipt, of course, cannot generate input tax to the domestic air carrier.

Q-21 In case of refund of domestic air ticket fare including the 12% VAT to the purcha ser for unused carriage or service, can the domestic air carrier-seller deduct the VAT previously remitted to the BIR against its VAT liability for the succeeding return period? The domestic air carrier-seller, making a refund to the purchaser of domestic air ticket shall require the latter letter to surrender unused flight coupon which shall be the basis for the seller to record Sales Return and deduct the12% VAT previously remitted to the BIR on the refunded ticket against its output tax liability during the month/quarter when the refund was made. A summary list of tickets refunded containing the name, TIN, address of the purchasers, domestic airline, ticket number, and the amount refunded including the VAT shall be prepared by the domestic air carrier-seller on a monthly basis but submission thereof shall be done quarterly, together the quarterly VAT return.

Q-22: How much should be the passed-on VAT for services rendered to the GOVERNMENT, its political subdivisions, instrumentalities or agencies including government-owned or controlled corporations (GOCCs)? The passed-on VAT for the services rendered to the GOVERNMENT its political subdivisions, instrumentalities, or agencies including GOCCs shall be 12%. However, the government or any of its political subdivisions, instrumentalities, or agencies, including GOCCs shall, before making payment on account of each purchase of goods and/or services tax at 12% VAT pursuant to Sections 106 & 108 of the Code, deduct and withhold a final VAT at 5% of the gross payment thereof. The 5% final VAT withholding rates shall represent the net VAT payable of the seller. The remaining 7% effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs, in lieu of the actual input but directly attributable or ratably apportioned to such sales to the government. Should actual input but exceed the standard input VAT of 7% of gross payments, the excess may form part of the sellers expense or cost. Convertly, if actual input VAT is less than the standard input VAT of 7% of gross payment, the difference must be close to expense or cost.

Q-23 Are sale of tickets to the government, its political subdivisions, instrumentalities or agencies including GOCCs, by a Domestic Airline with international operations to cover transport of passengers and/or cargoes from the Philippines to a foreign country and vice versa, subject to the 5% final VAT withholding? No. The final withholding VAT in only a procedure for collecting the VAT from government money payments and will be imposed only if the service to be rendered is subject to the 12% VAT. The transport services from the Philippines to a foreign country is subject to VAT at 0% while the transport services from any foreign country to the Philippines is exempt from VAT due to lack of tax jurisdiction. Accordingly, the sale of tickets to the government representing services which are either zero rated or exempt are not subject to the final VAT withholding.

Q-25: What is the basis in the computation of output VAT on sale of services of the airline company? The basis in the computation of output VAT of an airline company is its gross receipts as defined in this Circular.

Q-26: When a Philippine Airline company whose carrier carries cargo from a foreign port to the Philippines and transships it on a domestic registered air carrier bound for another Philippine port, is the income derived therefrom subject to VAT? Only the portion where the cargo is carried by a domestic air carrier from one Philippine port to another Philippine port is subject to VAT which is assessed on and payable by the Philippine company/domestic airline company.

Q-28: Are other income of domestic airline companies earned on cancelled tickets subject to VAT? All related income such as penalty or charges earned on the cancellation of tickets by the clients of domestic airline companies are subject to VAT. Q-29: Can a taxpayer whose main/principal line of business is subject to VAT and therefore VAT-registered, likewise register under the VAT its secondary lines of business which are exempt from VAT under Section 109 of the Code? Yes. Section 109(2) of the Tax Code provides A VAT-registered person may elect that Subsection (1) [referring to exempt transaction] not apply to its sale of goods or properties or services. Perforce, if the main/principal line of business is subject to VAT and the taxpayer engaged thereon is VAT registered, said taxpayer may elect that all his exempt transactions will be placed within the VAT system.

Q-30: Can an international airline company who is engaged in other activities subject to VAT, i.e. leasing of properties, etc., elect that all its business activities be subject to VAT? No. The main or principal business of an international airline company is VAT exempt because the same is subject to the percentage tax under Title V of the Tax Code. Therefore, the international airline can not elect that its exempt principal business be subject to VAT even is its secondary business are subject to VAT. Q-31: How do we determine the main or principal business of a taxpayer who is engaged in mixed business activities? In determining the main or principal business of a taxpayer, we apply the pre-dominance test. Under this test, if more than 50% of its gross sales and/or gross receipts comes from its business/es subject to VAT, its main/principal business falls within the VAT system making its status as a VAT person. Otherwise, he cannot be considered as VAT person eligible for the election provided for under Section 109(2) of the Tax Code.

Thank you Marivic Acosta-Galban Chief, Withholding Tax Division BIR, National Office 926-9328/926-9347/926-9351 www.bir.gov.ph BIR Contact center: 981-8888