THE Bureau of Internal Revenue (BIR) in its BIR Rulings have previously tackled the issue of a tax-exempt entity importing goods free of duties and taxes. In VAT Ruling No. 019-05 dated Sept. 20, 2005, the BIR confirmed that Cebu Pacific is exempt from the VAT on its importation of aircraft, aircraft equipment, engines, machinery, spare parts and accessories consistent with Section 107 of the Tax Code and its franchise, RA No. 7151.
Under Section 11 of RA No. 7151, Cebu Pacific is subject to the (a) corporate income tax; (b) a franchise tax of five percent (5 percent) of its gross revenue derived from transport operations; and (c) taxes on its real property on earnings from activities other than air transportation. Notwithstanding the foregoing, Cebu Pacific ipso facto enjoys all tax privileges and other favorable terms granted to any competing individual, partnership or corporation.
In BIR Ruling No. 3-95, dated Jan. 6, 1995, the Commissioner of Internal Revenue confirmed that Cebu Pacific was exempt from the VAT on its importation of aircrafts, aircraft equipment, engines, machinery, spare parts and accessories because Cebu Pacific enjoyed all the tax exemption privileges enjoyed by PAL under PD No. 1590 pursuant to the ipso facto clause under Section 11 of RA No. 7151. Based on Section 13(2) of PD No. 1590, PAL is exempt from the VAT on the importation of aircraft, aircraft equipment, engines, machinery, spare parts and accessories under its franchise.
However, in BIR Ruling No. 119-95 dated Aug. 8, 1995, the BIR strictly construed Smart’s franchise on its exemption from VAT on importation which states that “a franchise tax equivalent to three per cent (3 percent) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof”. The phrase was interpreted to not include an exemption from VAT on importation. The VAT was considered as a tax on the privilege of importing goods whether or not the taxpayer is engaged in business, and regardless of whether the imported goods are intended for sale, barter, or exchange, or for personal use. Importation for personal use covers importation of capital equipment, or any other goods to be used in the taxpayer’s business, not necessarily intended for sale, barter, or exchange and regardless of whether the taxpayer’s business is VAT-registered or not.
Moreover, in Lubwell Corporation vs. CIR, CTA Case No. 6609, July 4, 2005, the Court of Tax Appeals ruled that an agent of a tax-exempt entity cannot claim the latter’s tax exemption as basis for not paying the excise tax. Basic is the rule that one who claims to be exempt from the payment of a particular tax must do so under clear and unmistakable terms found in the statute. This is because tax exemptions are strictly construed against the taxpayer and highly disfavored. The Court will not declare that the power of taxation had been surrendered unless the intention to surrender the same is manifested by words too plain to be mistaken. When exemption is claimed, it must be shown indubitably to exist and the one claiming tax exemption must be able to point to some positive provision of law creating the right. It cannot be allowed to exist upon a mere vague implication or inference.
It is also established in Philippine jurisprudence that tax laws should not be allowed to be circumvented by various arrangements and schemes in order to evade payment of just taxes [United Overseas Bank vs. CIR, C.T.A. CASE NO. 6869. July 21, 2006].
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