Revenue Regulations No. 15-2015

On Dec. 28, 2015, the Department of Finance (DOF), as recommended by the Bureau of Internal Revenue (BIR), issued Revenue Regulations (RR) No. 15-2015, amending certain provisions of RR No. 16-2005, otherwise known as the Consolidated Value-Added Tax (VAT) Regulations.  In particular, RR No. 15-2015 made the following amendments:

1. Section 4.109-1(B)(1)(s) of RR No. 16-2005, stating that the transport of passengers by international carriers doing business in the Philippines are exempt from the VAT, pursuant to Section 109(1)(S) of the National Internal Revenue Code of 1997 (Tax Code), as amended by Republic Act (RA) No. 10378.  The new provision is actually the same as Section 6 of RR No. 15-2013, which implements RA No. 10378 (An Act Recognizing the Principle of Reciprocity as Basis for the Grant of Income Tax Exemptions to International Carriers and Rationalizing Other Taxes Imposed Thereon by Amending Sections 28 (A) (3) (A), 109, 118 and 236 of the National Internal Revenue Code (NIRC), as Amended, and for Other Purposes.

Note that the last sentence of both particular sections in the regulations mention that international carriers exempt under Sections 109(1)(S) and 109(1)(E) of the Tax Code shall not be allowed to register for VAT purposes.  This may be addressing a previous attempt made in 2006 by a branch of an international airline to update its registration with the BIR, to change its tax type from percentage tax to the VAT.

This sentence imposes another qualification on Section 109(2) of the Tax Code, which allows taxpayers the option of having their sales of goods or properties or services (otherwise qualified as VAT-exempt transactions) subject to the VAT.

2. The old Sections 4.109-1(B)(1) (t) and (u) of RR No. 16-2005 referred to the importation of equipment (life-saving/safety, rescue, communication, navigation, machinery, spare parts for construction, repair, renovation or alteration of any merchant marine vessel) as previously provided under RA No. 9295 (The Domestic Shipping Development Act of 2004).

Since the VAT-exempt incentives on these importations expired in May 2014 pursuant to RA No. 9295, there is no need to include the enumerations in the regulations.

The amended Section 4.109-1(B)(1)(t) now refers to VAT-exempt sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations.  This was actually stated in Section 4.109-1(B)(1)(s) before RR No. 15-2015.  This specific provision no longer mentions the requirements of tonnage and age of the vessels, but rather refers to the requirements on restriction on vessel importation and mandatory vessel retirement program of the Maritime Industry Authority (MARINA).

On the other hand, the amended Section 4.109-1(B)(1)(u) now refers to the importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations.  This was previously Section 4.109-1(B)(1)(v), which means that the enumeration of specific exemptions has again been “re-numbered”, ending with the letter “w”.

For VAT-exempt importations, the DOF, and not the BIR, is the responsible government agency which issues the corresponding orders/endorsements to the Bureau of Customs (BOC) to allow VAT exemption.

While RR No. 15-2015 refers to the VAT, it is noteworthy to be reminded of the exemptions and tax types applicable to the international carriers, which is the particular taxpayer focused on by these regulations.

International carriers having flights or voyages originating from any port or point in the Philippines, irrespective of the place where passage documents are sold or issued, are subject to income tax as the gross Philippine billings tax (GPBT) of two and one-half percent. However, the international carrier may avail of a preferential (lower) tax rate or exemption on the basis of an applicable tax treaty or international agreement to which the Philippines is a signatory or on the basis of reciprocity, i.e., Philippine carriers operating in the home country of an international carrier are actually enjoying the income tax exemption.  Currently, international airlines based in the United States of America, the United Arab Emirates, the Kingdom of Netherlands, the Republic of the Netherlands and Qatar have secured BIR rulings confirming the exemption from the GPBT.  On the other hand, international airlines based in the Kingdom of Japan have availed of the preferential tax rate of one and one-half percent based on the applicable tax treaty.  Note the BIR only applies the GPBT rate (or the preferential tax rate or the exemption from GBPT) only on income that forms part of the gross Philippine billings.  All other income earned in the Philippines are subject to the regular corporate income tax of 30 percent of the taxable income.

On the other hand, international air carriers and international shipping carriers doing business in the Philippines on their gross receipts derived from the transport of cargo from the Philippines to another country are subject to common carrier’s tax (Percentage Tax on International Carriers) equivalent to three percent  of their quarterly gross receipts.

Finally, note that under RR No. 15-2013, the BIR requires the international carrier to secure a BIR ruling to confirm either the preferential tax rate or exemption from GBPT.

Andrew James Gerard Dulay Ruiz is a director from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice and Tier 1 leading tax transactional firm in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

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