Saturday, January 29, 2011

Big loss to Philippine civil aviation

IF THERE’S one government official from the Arroyo administration who was not tainted with scandal, he is no other than former Manila International Airport Authority general manager Alfonso Cusi. That’s why it really saddened me to read in the Inquirer’s Dec. 22, 2010 issue that Cusi had ended his principled stand by irrevocably resigning as head of the Civil Aviation Authority of the Philippines (CAAP).

Nobody, not even President Aquino, could have forced Cusi to resign as the post of CAAP director general carries with it a fixed term. But resign Cusi did because he figured that with all the political pressures put on him, he would only be half-effective in completing the much-needed reforms he had started at CAAP. It proved too much for Cusi that the Department of Transportation and Communication and the CAAP board violated no less than the charter of the CAAP by ramming the appointment of seven people to key posts at CAAP.

Thrown to the dogs by the DOTC, the CAAP and even the Civil Service Commission, which approved the appointments, was the rule of law and, along with it, the independence and autonomy of CAAP. Indeed, the CAAP is back to square one as the favorable pre-audit report from the European Union which it had generated for Philippine civil aviation under Cusi is now meaningless.

No, make that: The CAAP has reverted to its former self, the Air Transportation Office (ATO). Lest we forget, it was the ATO which earned for the country a downgrade from the US Federal Aviation Authority (FAA) because it was turned into a repository of unqualified political appointees.

CAAP, unlike ATO, was supposed to be independent of the DOTC. But whatever happened to that independence and how come the DOTC just put in seven people at CAAP, in utter disregard of CAAP rules and procedures?

What was done to ATO is now being done as well to CAAP. So heaven help us when the FAA and the ICAO audit Philippine civil aviation anew. From being downgraded to category 2, we might find ourselves downgraded further, which would result in our planes being not allowed to fly to many countries and foreign-owned planes limiting their flights to the Philippines.

Cusi can always return to the private sector or make a run for Congress in the next elections. His resignation was a big loss not for him but for the CAAP and Philippine civil aviation.

 How friendly are the Philippine skies?

In an effort to enhance competition in an already vibrant airline industry, the Philippines is taking a major step towards easing restrictions within the commercial aviation sector. Government has announced that an executive order will be issued that will further liberalize the air transportation industry by allowing international airlines to use secondary gateways, a privilege previously exclusive to domestic carriers. Along with the increase in the number of stakeholders and the regulatory challenges, tax is certain to be an issue intertwined with flying in and out of the Philippine skies.
The taxation of revenues of international carriers, regardless of whether they have so-called "permanent establishments" in the Philippines, has been the subject of debate since the concept of Gross Philippine Billings was introduced by Presidential Decree (PD) 69 in 1972.
In the recent decision of South African Airways vs. Commissioner of Internal Revenue, G.R. No. 180356, promulgated Feb. 16, 2010, the Supreme Court held that "if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2.5% of its Gross Philippine Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% (now 30%) of such income." In so ruling, the High Court dismissed claims that international carriers without landing rights in the Philippines are exempt from paying income tax. The Supreme Court effectively reiterated its ruling in the landmark 1987 case of British Overseas Airways Corp. that offline carriers with local general sales agents are considered resident foreign corporations doing business in the Philippines, thus tickets sales are subject to corporate income tax under Sec. 28 (A)(1) of the Tax Code.
Prior to the South African Airways case, the taxation rules on foreign carriers were not as clear. Under PD 1355, which amended the 1977 Tax Code, gross Philippine billings (GPB) include gross revenue derived from the sale of tickets in the Philippines covering the carriage of passengers from anywhere in the world and cargo or baggage originating in the Philippines. In the 1997 Tax Code, however, GPB was redefined to only include 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."
This new concept had raised issues on the taxability of offline carriers on their income from the sale of tickets in the Philippines through their local agents. At first blush, it appears that since these carriers do not transport passengers and cargo from the Philippines, they are not subject to tax since they do not derive taxable GPB as defined under the 1997 Tax Code. This also meant that offline carriers cannot thus be considered as nonresident foreign corporations doing business in the Philippines.
However, in the case of Air Canada vs. Commissioner of Internal Revenue, CTA (First Division) Case No. 6572, promulgated Dec. 22, 2004, the CTA held that offline carriers are considered resident foreign corporations since they are doing business in the Philippines. Citing Supreme Court rulings, the CTA reasoned that a foreign airline selling tickets in the Philippines through its local agents shall be considered as engaged in trade or business, as these activities show continuity of commercial dealings performed in pursuit of business purpose. Such ruling was sustained by the CTA En Banc in the appeal made by Air Canada (CTA EB No. 86, promulgated Aug. 26, 2005).
The Supreme Court sustained the Air Canada ruling in the South African Airways decided in 2010.
In the South African Airways case, the Supreme Court noted that there are no specific criteria as to what constitutes doing business. The Supreme Court held that the term "engaged in business in the Philippines" implies "continuity of commercial dealings and arrangements" which includes the performance of acts pursuant to the purpose and object of the business organization, such as the appointment of a local agent. Since the sale of tickets -- the activity which produces the income -- is done in the Philippines even if the carriage of person, baggage, cargo or mail is done outside the Philippines, it is a Philippine-sourced income subject to tax.
From these rulings, it can be inferred that the courts steadfastly held to the source principle in Philippine income taxation, which contemplates the idea that an alien is subject to Philippine tax if he or she derives income from sources within the Philippines. This is not at all contradictory to the subject of tax on GPB because the situs of taxation is still the primary consideration. In case of airlines with landing rights in the Philippines, the determination of the situs of taxation is the service which is provided in the Philippines, i.e., the carriage of persons or cargo from the Philippines. For offline carriers, on the other hand, the determination of the status of tax is the place of sale of tickets, such that if the tickets are sold in the Philippines, the income from these sales is subject to tax.
International airlines that will take advantage of Government’s pocket open skies policy will be subject to the GPB tax regime since they would carry passengers from domestic locations and fly them to international destinations.
Now that the Supreme Court has clarified the rules on the taxability of foreign carriers, the willingness to open the market to cross-border investments could very well result in more revenues for Government, increased participation of foreign players and improved services from local airlines at competitive prices that will benefit the flying public.

4. P80-million fund for NAIA's VOR not included in P4-billion deal — CAAP
 MANILA, Philippines (PNA) — Civil Aviation Authority of the Philippines (CAAP) Director-General Ramon Gutierrez on Thursday said that the P80-million would-be fund to purchase new aviation equipment is not included in the P4-billion aviation deal.

Gutierrez said the P4-billion aviation deal between the government and the Thales-Sumitomo Group that Senator Estrada had questioned was accorded in 1998. “Ours is different. The P80-million fund was only meant to buy a new very high frequency omni-directional range (VOR) for the Ninoy Aquino International Airport (NAIA).”

According to him, the P4-billion contract was intended for the modernization of the whole air traffic control system of the country.

He said since the CAAP has diminutive resources and cannot be able to procure such device, the Manila International Airport Authority (MIAA) will make the financial arrangement while the aviation agency takes care of the services. From its original P120-million funds they requested, the budget was slashed to P80-million.

However, the P80-million is P2-million short of the VOR’s original price in the foreign market. He disclosed that he was considering a Korean company that was offering a VOR that is worth P80-million. “But we could not grab it until we know that it is the same brand that we are currently using,” Gutierrez said.

Another foreign company has offered the CAAP of equipment leasing which cost only P50-million. “Malaki ang matitipid, sa open bidding, but, we are inclined to buy a new one because its life span is approximately 10 to 12 years.”

The old VOR made headlines when it conked out on June last year that triggered the cancellation of at least 50 domestic and international flights at the three terminals of the Ninoy Aquino International Airport.

The glitch was additional burden to the Philippines when it was working out for getting back the category 1 status after the United States Federal Aviation Administration downgraded the Philippine aviation to category 2 in 2008.

Asked if he is optimistic that the European Union would lift restrictions once the foreign evaluators resume inspection in September, this year, he said they are still preparing for such assessment.

The Philippines is one of the countries in the world that has been blacklisted by the European Community where the country’s all airlines are banned from flying to any European bloc because of “serious safety deficiencies” in the Philippines’ regulation of carriers.


NEHA JAIN                                                                                                                

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