"The Government should not provide tax breaks to international carriers since this would be unfair to domestic competitors charged similar taxes abroad," a Finance department official said.

"Foreign airlines are charged common carriers tax and gross Philippine billing tax but our local airlines are also charged different kinds of taxes in other countries," Finance Undersecretary Gil S. Beltran said on Friday.

Flag carrier Philippine Airlines (PAL) in a letter to the Department of Finance (DoF), identified the array of income, business and percentage taxes it pays in other countries where it operates.

Australia, Canada, China, Indonesia, Japan, Singapore, Thailand, the United States and Vietnam were said to all charge a corporate income tax, with rates reaching as high as 30% of revenues generated in that particular country, the letter stated.

Value-added taxes (VAT) are likewise levied in Japan, Thailand and Vietnam, while goods and service taxes are imposed in Canada and Singapore.  The US also charges a franchise tax, while China requires business taxes and local taxes.

"It is discriminatory to our domestic carriers, as represented by PAL, for the government to lift taxes on international carriers while they pay these taxes for their operations abroad," Mr. Beltran said.

Foreign airlines, through the Joint Foreign Chambers have been urging the government to stop charging the 2.5% gross Philippine billing tax and 3% common carriers tax imposed on gross receipts.  This came as Air France-KLM the sole European carrier operating in the Philippines, announced that it would phase out direct flights between Manila and Europe due to the heavy tax burden.

The international carriers were supported by various leaders in Congress who vowed last week to pass measures that would lift the taxes claiming that the Philippines is the only country imposing such fees on airlines.

Mr. Beltran, however, argued that "other countries may not have a common carriers' tax or a gross Philippine billing tax specifically, but they have similar income and business taxes imposed on the foreign operations of our domestic airlines."

Moreover, domestic carriers are also subject to 12% VAT and 30% corporate income tax here, atop of the taxes they pay to other countries, he pointed out.

The Finance department issued a position paper last week opposing calls to remove the gross Philippine billing tax and common carriers tax, claiming that foreign airlines already enjoy "considerably preferential" rates compared to those imposed on local airlines.

A sticking point for international carriers, though is the zero-rated VAT enjoyed by domestic carriers, allowing them to claim back the sales tax they paid on their inputs.

Mr. Beltran explained that the government only granted this since the services of domestic carriers are considered exports.

"The same treatment cannot be extended to foreign airlines since we have no way of verifying their purchases," he explained.

In response, an official of the European Chamber of Commerce of the Philippines (ECCP) accused the government of "comparing apples with oranges, and that successfully for many years."

"The international carriers pay taxes on gross revenue whether they make money or not.  The local carriers pay income tax when they make money," ECCP Executive Vice-President Henry J. Schumacher said in a text message on Friday.  Besides, all airline companies pay income taxes in their home countries, he pointed out.

"The common carriers' tax is especially burdensome as the foreign airlines pay on gross, even for tickets not generated in the Philippines," Mr. Schumacher said.

European carriers are particularly hard-hit by these taxes since they incur a lot of costs, traveling long distances between Europe and Asia, he added.

Other airlines are also in the same boat, Mr. Schumacher claimed, with US-based Delta Air Lines, Inc. already reducing its flights to the country, and Japanese carriers "looking at the return on their investments flying to the Philippines."

Source: Business World; Front Page; 07 November 2011