VZCZCXYZ0000
OO RUEHWEB

DE RUEHML #2699/01 3460832
ZNR UUUUU ZZH
O 110832Z DEC 08
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2649
INFO RULSDMK/DEPT OF TRANSPORTATION WASHDC IMMEDIATE
RUCPDOC/USDOC WASHDC IMMEDIATE

UNCLAS MANILA 002699 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EAP/MTS 
STATE FOR EEB/TRA/AN 
 
E.O. 12958: N/A 
TAGS: EAIR ECON WTRO USTR RP
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 
receipts. 
(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 
NIRC: 
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 
products." 
 
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 
users." 
 
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 
convention). 
 
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 
taxation. 
 
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 
goelv@iata.org 
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 
 
KENNEY