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Tax rule for airport terminal fees

EFFECTIVE August 1, 2012, Domestic Passenger Service Charge (DPSC) commonly known
as airport terminal fee, which passengers pay at designated counters in the Ninoy Aquino
International Airport (Naia), shall now be paid upon purchase of airline tickets through Internet
booking, airline ticket offices and ticketing or travel agents.
On July 13, 2012, Revenue Memorandum Circular (RMC) 34-2012 was issued by the Bureau of
Internal Revenue (BIR) clarifying the tax implications of integrating the airport terminal fee at the
point of sale of airline tickets, specifically the invoicing and recording of the terminal fee in the
books of airline companies and Manila International Airport Authority (Miaa).
Under the RMC, the airline company shall collect the terminal fee from passengers and shall
include it in the official receipt to be issued to the passenger on which the output tax shall be
computed. Upon collection, the amount shall be recorded as income and the corresponding
output tax shall be recognized as a liability.
Upon remittance of the collected terminal fee to Miaa, the Miaa will, in turn, issue an official
receipt to the airline company acknowledging the receipt of the income. The official receipt
shall indicate the amount of terminal fee collected and the corresponding value-added tax
(VAT).
While the terminal fee received is to be reported as an income of Miaa, such payment shall not
be considered as part of Miaas gross receipts subject to creditable withholding tax.
On the part of the airline company, the remittances made to Miaa are to be booked as the
complete reversal of the entries made upon collection. The amount of output tax recognized
upon collection from the passenger will be the same amount of input tax upon remittance of
the amount to Miaa.
For acting as collecting agent for Miaa, the airline company will receive service fees from Miaa.
Such service fees shall be subject to VAT and governed by the rules on government money
payments subject to withholding VAT and expanded withholding tax.

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As can be seen from the above transactions, the airline companies are only the collecting
agents of Miaa as regards the collection of terminal fees from passengers. Clearly, the amount
collected is the same amount remitted to Miaa. The amount of output VAT is the same amount
of input VAT claimed resulting in a zero net VAT payableindicating that no income has been
earned by the airline company from the transaction.
The relation between airline companies and Miaa under the MOA is that of an agent-principal
relationship, where the agent performs collection services on behalf of the principal for a
commission.
It is, therefore, surprising to note that, in the above RMC, the amount of terminal fee collected
by the airline company is treated as an income rather than as a liabilitythe amount collected
not being his money but that of Miaa.
When one receives an amount for and on behalf of another, that is not its income but a liability
to the person who owns that money. Besides, it can only be considered as an income if a
corresponding service has been rendered or that a good has been sold by the airline company
from which the income arises. In this case, all the airline company does is to collect the
amount for and on behalf of Miaa.
In a number of its rulings and issuances pertaining to transactions of agent-principal
relationship, the BIR had consistently ruled that receipt made by a party, who merely holds the
payments for another party, should not be included in the gross receipts and income of the
agent for purposes of VAT and income tax.
In these BIR rulings, the collections were required to be recorded as payable and, instead of
official receipt being issued, a non-VAT receipt or acknowledgment receipt should be issued to
the agent.
Also, in order that the amount collected shall not form part of the gross receipts subject to
VAT, the party (in the case of the terminal fee, it is Miaa) who ultimately benefits from the
amount collected should issue the invoice/official receipt directly in the name of the payor (the
passenger).
Of course, this may be difficult to do considering that there are various passengers to deal
with. But still, there could have been a way to make it work, such as authorizing the collection
agents (the airline companies to issue the receipts on behalf of Miaa).
Because of the way the terminal fees are to be receipted and recorded, the agency-principal
relationship between them and Miaa has been disregarded. Instead, the airline company is
regarded as the income recipient and the payor of the terminal fee to Miaa at the same time.
From a tax perspective, this does not do well with the airline companies. They are being taxed
more than what they should be. Since the terminal fee shall be recorded as income, it shall be
subject to expanded withholding tax on an income which is not theirs. In short, they will have to
pay income tax in advance (by way of withholding tax) on an income that is not theirs. Worse,
when they remit to Miaa, they will have to remit the full amount without any deduction for the
tax withheld from them when they collected.

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Also, for purposes of paying their local business taxes with the local government, their tax would
be higher considering that local taxes are based on gross, receipts which would include the
terminal fees. Also, airline companies may also be required to pay the VAT in case the output tax
exceeds the input tax due to timing difference at the time of collection and the time of remittance.
****
The author is a tax specialist of Du-Baladad and Associates Law Offices, a member-firm of
World Tax Services Alliance.
The article is for general information only and is not intended, nor should be construed, as a
substitute for tax, legal or financial advice on any specific matter. Applicability of this article to
any actual or particular tax or legal issue should be supported therefore by a professional
study or advice. If you have any comments or questions concerning the article, you may e-mail
the author at reynaldo.prudenciado@bdblaw.com.ph, or call 403-2001, local 380.

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