Supreme Court clears PAL of BIR tax claim

MANILA, Philippines - The Supreme Court (SC) has affirmed the exemption of Philippine Airlines (PAL) from payment of minimum corporate income tax (MCIT) amounting to over P272 million for the years 2000 and 2001.

In a 29-page decision penned by Associate Justice Minita Chico-Nazario, the third division of the High Court affirmed the ruling of the Court of Tax Appeals (CTA) dated Aug. 9, 2007 that nullified the letter of the Bureau of Internal Revenue (BIR) demanding payment of MCIT worth P272,241,886 from PAL.

The Court ruled that the BIR failed to convince it that MCIT is income tax for which PAL is liable considering that Section 13 (a) of its franchise provides that the corporate income tax of PAL shall be computed in accordance with the National Internal Revenue Code (NIRC).

Since the NIRC of 1997 imposes MCIT, and PAL has not applied for exemption from the said tax, the BIR insisted that the airline is subject to the same.

But the Court declared: “Under the doctrine of strict implementation, the burden is upon CIR [Commissioner of Internal Revenue] to primarily prove that the new MCIT provisions of the NIRC of 1997, clearly, expressly and unambiguously extend and apply to PAL, despite the latter’s existing tax exemption…Since the CIR failed in this regard, the Court is left with no choice but to consider the MCIT as one of ‘all other taxes,’ from which PAL is exempt under the explicit provisions of its charter.”

Concurring in the ruling were Associate Justices Consuelo Ynares-Santiago, Presbitero Velasco Jr., Antonio Eduardo Nachura and Diosdado Peralta.

Based on its franchise, PAL’s taxation is governed by two rules – PAL shall pay the government either basic or corporate income tax or franchise tax, whichever is lower; and the tax paid by PAL, under either of the two options, shall be in lieu of all other taxes, duties, and other fees, except real property tax.

The SC explained that basic corporate income tax of PAL shall be based on its annual next taxable income, computed in accordance with the NIRC while its franchise tax shall be two percent of the gross revenues derived by PAL from all sources.

Under the NIRC, a domestic corporation must pay whichever is higher, an income tax under Section 278 (a) of the NIRC of 1997 or the MCIT under Section 27 (e), also of the NIRC of 1997, equivalent to two percent gross income of the corporation.

The Court stressed that although this may be the general rule in determining the income tax due from a domestic corporation under the NIRC of 1997, it can only be applied to PAL to the extent allowed by the provisions of its franchise, particularly Section 13 which governs its taxation.