March 26, 2004

BIR RULING [DA-130-04]

RR 15-2002; RR 2-98; 34-2000;

178-98

International Air Transport Association

12/F Sagittarius Building
H.V. dela Costa Street
Salcedo Village, Makati City

Attention: Mr. Marcelito S. Jovida

IDFS Manager-Philippines

Gentlemen :

This refers to your letters dated October 24, 2002 and November 18, 2002
requesting for clarification on the following issues:

1. Whether or not International Air Transport Association, Phils.

(IATA Phils.) is required to withhold taxes under the Expanded
Withholding Tax on cargo sales proceeds it receives from cargo
agents via a direct deposit to the IATA-Cass Hinge Account which
are automatically distributed or remitted to the member airlines on
the following day?

2. Are the taxes withheld by cargo agents sufficient compliance with

the withholding tax provisions of the NIRC in view of the nature
of the transaction coupled with the tax-exempt status of IATA
Phils., being a non-profit organization?

3. What withholding tax rate should be withheld on income payments

to international airlines as a transportation contractor considering
that majority of foreign international airlines are covered by tax
treaties between the Republic of the Philippines and the foreign

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 country where the international airline is a resident?

It is represented that IATA-Phils. is a branch office of the IATA Head Office

located in Montreal, Canada; that it is registered with both the Securities and
Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR) as a
non-profit organization mainly to administer and manage the accreditation and
monitoring of passenger and cargo sales of travel and cargo agents; that IATA-Phils.
serves as a clearinghouse; that its operation is subdivided into the Bank Settlement
Plan (BSP) and Cargo Account Settlement System (CASS); that BSP refers to
passengers while CASS relates to cargo; that its operating expenses are shared, billed
and reimbursed by participating member airlines in accordance with a set of
established worldwide systems and procedures for sharing administration/clearing
expenses; that the transactions that gave rise to your queries are the following:

1. An exporter or shipper obtains the services of a Cargo Agent who

is a duly accredited participant of IATA-CASS. Cargo Agent
issues an Airline Airway bill (AWB) and bills the exporter or
shipper for cost of freight plus markup, documentation and
transportation expenses etc.

2. Cargo Agent, in turn, reports its sales of services to IATA Phils.

under its CASS by submitting copies of the airlines AWBs issued
for each sales period covering 1-15 and another 16-end of month
not later than the 5th day after end of each half month sales period
to an Independent Encoding Agency (IEA) contracted by IATA
Phils. The data files generated by the IEA are transmitted
electronically to IATA Singapore (another branch office of IATA
which has the capability to undertake computer processing of sales
data) where the data is processed. IATA Singapore then generates
cargo agents billing analysis and airline billing analysis which are
sent electronically also to the concerned cargo agents and airlines
respectively. The resulting reports are reviewed by both cargo
agents and airlines vs. the AWB copies and any discrepancies
noted are either covered by Agency Debit Memos (ADMs) or
Agency Credit Memos (ACMs) which are to be taken up in the
succeeding sales reporting period as period adjustments. There are
at present ninety two (92) participating cargo agents and twenty
two (22) member airlines. Transactions are in two (2) acceptable
currencies (i.e. in PHP and/or USD)

3. The Cargo Agent remits its payment to the airline via direct
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 deposit to the IATA-CASS Hinge Account maintained with a local
branch of an international bank, which is maintained one in PHP
and another in USD. The cargo agent then remits to the BIR the
two percent (2%) tax withheld and issues the covering Creditable
Withholding Tax Certificate (CWTC) to each concerned airline.
The CWTC then serves to support the deduction taken by the
airline concerned in its quarterly income tax return. The whole
amount deposited to the IATA-CASS Hinge Account by the Cargo
Agents is automatically apportioned or distributed proportionately
in accordance with the Airline Billing analysis generated by IATA
Singapore to the Member Airlines concerned. Each airline will be
credited or will be receiving less than one hundred percent (100%)
of their share in the original amount billed per Airline Billing
Analysis since two percent (2%) if not four percent (4%) thereof
had earlier been deducted therefrom and remitted to the BIR as
withholding tax.

4. Assuming without admitting that the payments made by cargo

agents to the IATA-CASS Hinge Account constitute income
payments subject to two percent (2%) withholding tax under the
NIRC and its implementing regulations, cargo agents cannot
withhold taxes on its remittances to the IATA-CASS Hinge
Account, IATA Phil., aside from being tax-exempt organization
exempt from the payment of income tax in the Philippines, is not
the transportation contractor referred to in the NIRC and its
implementing regulations. On the other hand, IATA-CASS's
remittance of payments to the concerned airlines may be said to
constitute an income payment to a transportation contractor subject
to two percent (2%) withholding tax under the provisions of the
NIRC and its implementing regulations. Thus, IATA-CASS would
arguably be the proper entity to withhold the two percent (2%)
withholding tax prior to remitting the payments to the concerned
member airlines.

In reply, please be informed of the following:

In the operation of the withholding tax system, the withholding agent is the
payor, a separate entity acting no more than an agent of the government for the
collection of the tax in order to insure its payment. The taxpayer, the person subject to
the tax imposed by law, is the payer and the taxing authority, the payee. In other

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 words, the withholding agent is merely a tax collector, not a taxpayer. Under the
withholding system, however, the agent-payor becomes a payee by fiction of law. His
(agent) liability is direct and independent from the taxpayer, because the income tax is
still imposed on and due from the latter. The agent is not liable for the tax as no
wealth flowed into him — he earned no income. The Tax Code only makes the agent
personally liable for the tax arising from the branch of its legal duty to withhold as
distinguished from its duty to pay tax. (Comm. Of Internal Revenue vs. Court of
Appeals, 301 SCRA 152 [1999])

Section 5 of Revenue Regulations No. 30-2003 provides viz:

"SEC. 5. PERSONS REQUIRED TO DEDUCT AND WITHHOLD.

— Sec. 2.57.3 of Revenue Regulations No. 2-98, as amended, is hereby further
amended to read as follows:

"Sec. 2.57.3. Persons required to deduct and withhold. — . . .

xxx xxx xxx

Agents, employees or any person purchasing goods or services paying

for and in behalf of the aforesaid withholding agents shall likewise withhold in
their behalf, provided that the official receipts of payments/sales invoice shall
be issued in the name of the person whom the former represents and the
corresponding certificate of taxes withheld (BIR Form No. 2303) shall
immediately be issued upon withholding of the tax.

All income payments which are required to be subjected to withholding

tax shall be subject to the corresponding withholding tax rate to be withheld by
the person having control over the payment and who, at the same time, claims
the expenses [e.g., payments to utility companies which are required to be
subjected to withholding tax shall likewise be subjected to withholding tax even
if the meter or billing statement (e.g., electric or water meter or the telephone
bill) is not in the name of the payor, as long as valid proof that payment of a
particular expense is being shouldered by the aforementioned payor (i.e.,
contract between the registered user of the meter and the payor); payments
made by persons who are sharing portion of the bill which is in the name of
another person as long as he is a duly constituted withholding agent and shall
only withhold on the portion of the expense being shouldered by him.

Income payments made thru brokers or agents or other person

authorized to collect/receive payments for and on behalf of the payee, whether
for consideration or otherwise, shall likewise be subject to the corresponding
withholding tax rates to be withheld by the payor/person having control over the
payment with the corresponding issuance of certificate of taxes withheld in the
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 name of the payee whom the agent represents.

The obligation to withhold is imposed upon the buyer/payer of income

although the burden of tax is really upon the seller-income earner hence,
unjustifiable refusal of the latter to be subjected to withholding shall be a
ground for the mandatory audit of his income tax liabilities (including
withholding tax) upon verified complaint of the buyer-payor."

Applying the above in the instant case, the exporter or shipper who obtains the
services of a Cargo Agent should be the withholding agent who is required to
withhold a two percent (2%) creditable withholding tax in favor of the government,
based on the amount appearing on the airway bill after deducting therefrom the
amount of discounts granted which shall be validated using the monthly cargo sales
reports generated by the IATA CASS for airway bills issued through their cargo
agents or the monthly report prepared by the airlines themselves or by their general
sales agents for direct issues made as provided for under Section 5 of Revenue
Regulations No. 15-2002.

On the above bases and on the theory that IATA Phils. was but a conduit and
was not actually the payor, it was not authorized to withhold the said expanded
withholding tax on cargo sales proceeds it receives from cargo agents via a direct
deposit to the IATA-Cass Hinge Account which are automatically distributed or
remitted to the member airlines on the following day.

However, there is no prohibition for the payor to designate an agent to act for
and in his behalf in the remittance of the said tax as long as the said remittance and
payments were made in the name of the payors. (BIR Ruling No. 034-2000 dated
September 5, 2000)

Thus, after due consideration, this Office is of the opinion as it hereby holds
that IATA is an agent of the airlines and withholding should be from the payor's end,
which in this case refers to the cargo agent. Nevertheless, since IATA was designated
an agent to act for and in behalf of the airlines in the remittance of the said tax, IATA
Phils. would arguably be the proper entity to withhold the 2% withholding tax prior to
remitting the payments to the concerned member airlines, since it has control of such
money payments. Hence, it shall effectively be the duly constituted withholding agent
pursuant to the above section of Revenue Regulations No. 30-2003. (BIR Ruling No.
178-98 dated December 24, 1998)

With respect to the rate of withholding tax, the same shall withhold 2% on its
remittances to the said foreign airlines being a transportation contractor pursuant to
Section 2.57.2(E)(3)(e) of Revenue Regulations No. 6-2001. However, the
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 preferential tax rate of 1.5% may be extended on foreign airlines whose country of
registry extends the same benefits to Philippine airlines pursuant to a tax treaty.

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be disclosed that the facts are different, then
this ruling shall be considered null and void. caIACE

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JOSE MARIO C. BUÑAG

Deputy Commissioner
Legal and Inspection Group
Bureau of Internal Revenue

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