Sep 192014
Reference ID Created Released Classification Origin
2008-12-11 08:32
2011-08-30 01:44
Embassy Manila


DE RUEHML #2699/01 3460832
O 110832Z DEC 08




E.O. 12958: N/A
SUBJECT: Discriminatory Philippine Taxes on Foreign Air Carriers

¶1. (SBU) Summary and Action Request: Northwest Airlines has raised
with us concerns about discriminatory taxes levied on foreign air
carriers serving the Philippine market. The airline is asking that
the Embassy lobby for the abolition of this tax, or for some
solution which would mitigate its effects. Post requests that
Department review the issue of Philippine taxes on foreign air
carriers and inform post whether these taxes in fact violate the
international obligations of the Philippines. End Summary.

¶2. (SBU) As Northwest has not wanted to be seen as taking the lead
on this issue, it is working through the International Air Transport
Association (IATA) to press for changes in the taxation regime. On
November 20, we met with officials of Northwest and IATA and
received a copy of IATA’s November 5 letter to the Philippine
Commissioner of Internal Revenue addressing the issue. IATA asserts
that the discriminatory tax has contributed to the departure from
the Philippine civil aviation market of some foreign carriers, and
that others might reduce service here if the issue is not resolved.
IATA also suggests that these taxes violate a number of
international agreements and may violate others, including bilateral
civil aviation agreements. Northwest has requested Embassy
assistance to lobby for changes to the Philippine tax regime.
Northwest and IATA are currently studying options short of
legislative action which might mitigate or resolve the problem. The
text of the IATA letter to the Philippine Bureau of Internal Revenue
is in para 3 below.

¶3. Text of letter:

5 November 2008
Mr. Sixto Esquivas VI
Commissioner of Internal Revenue
Room 501/511 BIR National Office Bldg
Diliman, Quezon City
Republic of The Philippines

Re: Philippine Taxes on Foreign Airlines

Dear Commissioner Esquivas,

On behalf of IATA and its member airlines operating in the
Philippines, I congratulate you on your appointment as the
Commissioner of Internal Revenue. We look forward to working with
you in close cooperation on challenges and opportunities related to
aviation. We respectfully request your urgent engagement with the
Executive and Administrative arms of Philippine Government to
relieve the punitive and discriminatory taxes imposed on foreign
airlines in the Philippines.

We understand that currently, all sales (passenger, cargo, excess
baggage and mail) by foreign airlines operating in Philippines are
subject to:

¶1. Common Carrier Tax – Under Section 118 (Percentage Taxes on
International Carriers) of the National Internal Revenue Code of the
Philippines (“NIRC”).
(A) International air carriers doing business in the Philippines
shall pay a tax of three percent (3%) of their quarterly gross
(B) International shipping carriers doing business in the
Philippines shall pay a tax equivalent to three percent (3%) of
their quarterly gross receipts.

¶2. Gross Philippine Billings – Under Section 28 (A)(3) s of the
3) International Carrier. – An international carrier doing business
in the Philippines shall pay a tax of two and one-half percent (2
1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:
“(a) International Air Carrier. – ‘Gross Philippine Billings’ refers
to the amount of gross revenue derived from carriage of persons,
excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of
sale or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or
point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger
takes place at any port outside the Philippines on another airline,
only the aliquot portion of the cost of the ticket corresponding to
the leg flown from the Philippines to the point of transshipment
shall form part of Gross Philippine Billings.
“(b) International Shipping. – ‘Gross Philippine Billings’ means
gross revenue whether for passenger, cargo or mail originating from
the Philippines up to final destination, regardless of the place of
sale or payments of the passage or freight documents.
We understand the Common Carrier Tax substitutes for VAT which would
otherwise be zero-rated on the principle that the services would be
consumed essentially outside the country. We further understand the
Gross Philippine Billings is essentially an income tax. These taxes
apply regardless of whether or not the tickets and airway bills are
sold inside or outside Philippines.

Alone these two taxes combined are estimated to directly cost the
airline industry in excess of PHP1,880,000,000 a year. Please be
informed that International Air Transport Association (IATA)
strongly opposes the continued collection of these taxes for the
following key reasons:

¶1. Discrimination against foreign operators: The taxes represent a
discriminatory tax burden on foreign air operators as the Philippine
operators are not subject to the same taxes. The foreign and
Philippine operators compete on many international routes and the
taxes thus result in an unfair cost advantage for the Philippine
operators. This discrimination is clearly counter to General
Agreement on Tariffs and Trade (GATT) and now World Trade
Organization (WTO) rules and International Civil Aviation
Organization (ICAO) resolutions.

Article III.2 of GATT 1947 states that “The products of the
territory of any contracting party imported into the territory of
any other contracting party shall not be subject, directly or
indirectly, to internal taxes or other internal charges of any kind
in excess of those applied, directly or indirectly, to like domestic

Article 23. iv) of ICAO’s Policies on Charges for Airports and Air
Navigation Services states that “The charges must be
non-discriminatory both between foreign users and those having the
nationality of the State in which the airport is located and engaged
in similar international operations, and between two or more foreign

The discrimination may also be counter to Bilateral Air Services
Agreements between the Philippines and your respective country.

The discrimination may also transgress non-discrimination articles
in your respective Bilateral Tax Treaties.

¶2. Unjustified Taxation on International Air Transport: Taxes on
international services are directly against the International Civil
Aviation Organization (ICAO) taxation policies. The ICAO Document
8632, entitled ‘ICAO’s Polices on Taxation in the Field of
International Air Transportation’, states: ‘Each Contracting State
shall … grant reciprocally … exemption from property taxes, and
capital levies or other similar taxes, on aircraft of other
Contracting States engaged in international air transport.’

In addition, ICAO has also adopted a resolution on the taxation of
the sale or use of international air transport: ‘With respect to
taxes on the sale or use of international air transport: each
Contracting State shall reduce to the fullest practicable extent and
make plans to eliminate all forms of taxation on the sale or use of
international transport by air, including taxes on gross receipts of
operators and taxes levied directly on passengers or shippers.’

The ICAO resolutions recognize that international air transport
involves the use of aircraft and goods and supplies outside any tax
jurisdiction. As such, these ICAO resolutions endorse the policy of
reciprocal exemption from taxes on aircraft and the elimination of
taxes on the sale or use of international air transport. ICAO
recognizes that its policy would assure equitable treatment for
international aviation throughout the many jurisdictions into which
it operates and further enhance the development and expansion of
international travel and trade. If the CCT and GBT continue to be
imposed on foreign airlines in the Philippines, Philippine based
carriers may find themselves exposed to similar taxes imposed in
countries around the world where they operate and from which they
are currently exempt.

The taxes ultimately lead to an increase in cost of travel and
transport. Independent Economics studies have shown that demand for
travel is very price sensitive and a 10% increase in airfare can
cause up to a 15% reduction in travel demand (Source: Gillen,
Morrison & Stewart ‘Air Travel Demand Elasticities: Concepts, issues
& Measurement’). This damages tourism and redirects foreign trade
elsewhere with inherent negative consequences for employment and
economic growth. Export costs are also necessarily higher. Such
taxes clearly undermine the Philippines’ competitive position viz
other regional countries and their international aviation services.
In addition, it is at odds with the Philippines’ commitments under
the International Convention on Civil Aviation (the Chicago

These and other taxes have in part or whole caused several foreign
airlines to terminate services to Manila in favor of serving other
countries with less burdensome tax regimes. Although oil prices have
receded recently, foreign airlines’ fuel bills remain significantly
higher than a year ago. In an industry where margins in a good year
fall below these rates of Philippine taxation, one could reasonably
expect further reductions in services to the Philippines, in favor
of services to neighboring countries. The economic impact to the
Philippines due to the loss of these services could greatly exceed
the tax currently collected.

IATA endorses the ICAO resolutions on taxation of aircraft and the
sale or use of international air transport and requests your
assistance to have the Philippine Government urgently revoke these
taxes, possibly by substitution of these taxes with VAT, which would
be zero-rated, for which a legislative amendment is not required.
Airlines believe there are legal grounds upon which to question
these taxes and are currently in discussion with taxation experts in
Manila on possible legal challenges to this continued discriminatory

Please do not hesitate to contact us if you need further
clarification or assistance.

Respectfully yours,
Vinoop Goel
Assistant Director
Industry Charges, Fuel and Taxation
Tel. +65 6499 2261
Fax +65 6415 1259
International Air Transport Association
111 Somerset Road, #14-05
Singapore 238164

CC: Department of Tourism, Philippines
Department of Transportation & Communication, Philippines
Department of Trade and Industry, Philippines
Board of Airline Representatives, Philippines

¶3. End text of letter




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