February 1, 2008

REVENUE MEMORANDUM CIRCULAR NO. 046-08

SUBJECT : Clarification of Issues Concerning Common Carriers by

Air and Their Agents Relative to the Revenue and Receipt
from Transport of Passengers, Goods/Cargoes and Mail,
and from Excess Baggage

TO : All Air Transport Operators, Their Agents, Internal

Revenue Officers and Others Concerned

I. Background

This Revenue Memorandum Circular is issued to clarify certain provisions

of the National Internal Revenue Code of 1997, as amended (Code), as it applies to
Air Transport Operators and their various Travel Agents as herein defined, as well
as, their suppliers to ensure that the law is properly implemented and taxes are
properly collected, in a manner consistent with acceptable business practices.

II. Definition of Terms

1. Common Carrier — refers to individuals, corporations, firms or

associations engaged in the business of carrying or transporting
passengers or goods or both, by land, water, or air, for compensation,
offering their services to the public and shall include transportation
contractors.

2. Gross Receipts — shall refer to the total amount of money or its

equivalent representing the contract price, compensation, service fee,
rental or royalty, including the amount charged for materials
supplied with the services and advance payments actually or
constructively received during the taxable period for the services
performed or to be performed for another person, excluding VAT,
but shall not include amount earmarked for remittance to a third
party as agreed in an implied or express contract or mandated by law
and invoiced/receipted by such third party directly to the real
customer or actual recipient of the service.

For common carriers by air, gross receipts is the amount actually or

constructively received as compensation for their services of

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 undertaking the contract of carriage by air.

3. International Air Carrier — shall refer to a foreign airline

corporation doing business in the Philippines having been granted
landing rights in any Philippine port to perform international air
transportation services/activities or flight operations from the
Philippines to anywhere in the world and vice versa, in the case of
on-line carrier, or having maintained business establishment, agent
or representative office in the Philippine for the sale of its own
tickets/passage documents or tickets/passage documents of other
airline companies, which airline companies operate without touching
any Philippine port, in the case of off-line carrier. International air
carrier includes both off-line carrier and on-line carrier.

4. Automated Ticketing System — refers to an automated process which

comprises the equipment, programs and procedures which allows
access to airline data stored in a Customer Reservation System
(CRS) or airline reservation system for the automated issuance of
Standard Traffic Documents.

5. Electronic Ticketing — refers to a method utilized to document the

sale of passenger transportation services (electronic ticket) and other
related services (electronic miscellaneous documents) without
requiring the issuance of paper value documents.

6. Travel Agents — shall refer to International Air Transport

Association's (IATA's) duly accredited travel agents who are
authorized to issue in the Philippines tickets of on-line and off-line
international air carriers.

7. IATA Cargo Accounts Settlement System (CASS) Cargo Agents —

shall refer to IATA's duly accredited cargo agents who are
authorized to issue in the Philippines cargo airway bills/passage
documents of on-line international air carriers.

8. General Sales Agents — shall refer to travel agents/cargo agents that

deal exclusively for and on behalf of a domestic carrier, or an on-line
international air carrier, or an off-line international air carrier, and
earn commission income for their services.

9. Refund — refers to the repayment to the purchaser of all or a portion

of a fare rate or charge for unused carriage or service.

III. Questions and Answers

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 Q-1: What kinds of common carriers are subject to 10% VAT rate
effective November 1, 2005, and to 12% VAT rate effective February
1, 2006 under Republic Act (R.A.) No. 9337?

A-1: Domestic common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to
another place in the Philippines are now subject to 12% VAT, but
with respect to transport of passengers, goods and cargoes from the
Philippines to any foreign port, the same is subject to VAT at
zero-rate (0%). Domestic common carriers which transport goods
and cargoes by land, however, are already covered by VAT even
prior to R.A. 9337.

Common carriers by land with respect to their gross receipts from the
transport of passengers including operators of taxicabs, utility cars for
rent or hire driven by the lessees and tourist buses used for the
transport of passengers shall continue to be subject to the 3%
percentage tax/common carrier's tax imposed under Section 117 of
the Code, but shall not be liable for VAT. On-line international
common carrier by air and sea shall continue to be subject to the 3%
common carrier's tax under Section 118 of the Code.

Q-2: What transactions of domestic air carriers are subject to 12% VAT?

A-2: Transport of passengers, goods or cargoes from one place in the

Philippines to another place in the Philippines is subject to 12% VAT.
Gross receipts derived from transactions incidental to the main
operations shall likewise be subject to 12% VAT.

Q-3: Are on-line international air carriers subject to VAT?

A-3: No. On-line international air carriers (international air carriers that
touch any port in the Philippines as part of their carriage operation)
are exempt from VAT. They are liable to the three percent (3%)
percentage tax on their gross receipts from outbound fares and
freight, pursuant to Section 118 of the Code.

Q-4: What about domestic air carriers engaged in both domestic and
international transport operations, are they subject to VAT on both
operations?

A-4: No. Domestic air carriers are subject to VAT only on their services
performed within the Philippines. The 12% VAT shall apply to their
income derived from domestic operations as mentioned under A-2
above. However, their international transport operations involve both
services performed within the Philippines and services performed

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 without. Their income from services involving the transport of
passengers, goods and cargoes from the Philippines to a foreign
country are derived from within but subject to zero-rate VAT
pursuant to Section 108(8) of the Tax Code. On the other hand, their
income from international transport operations involving the transport
of passengers, goods and cargoes from a foreign country to the
Philippines are income derived from services rendered outside the
Philippines, hence, exempt from business taxes (including the VAT),
due to lack of tax jurisdiction.

Q-5: In the case of transport by a domestic air carrier (engaged in both

domestic and foreign operations) of passengers and/or cargoes from
a domestic port to a foreign port but passing through another
domestic port to load additional passengers and/or cargoes bound
for foreign destination, will the entire journey be subject to a zero
rate VAT?

A-5: Yes, the receipts from the entire journey from a domestic port to a
foreign port shall be subject to zero rate VAT. However, if before
proceeding to the foreign port the carrier loads passengers and/or
cargoes from a domestic port and unloads them in another domestic
port, the gross receipts therefrom (domestic port to another domestic
port) shall be subject to 12% VAT.

Q-6: Can on-line international air carriers opt to be under the VAT
system and be subject to VAT at zero-rate on their outbound
international operations similar to domestic air carriers registered
as domestic corporations?

A-6: No. The business of an international air carrier is exempt from VAT
because it is a sale of services subject to percentage tax. If the main
business is exempt from VAT, the VAT-exempt person can not elect
that the said exempt business/es be placed under the VAT system.
The option to be subject to VAT on its exempt transactions is
available only to a VAT-registered person pursuant to Section 109(2)
of the Code, as amended by R.A. 9337.

Q-7: Are domestic air carriers with international operations considered as

"international air carriers" and be subject to the 3% percentage tax
under Sec. 118 instead of zero-rate VAT?

A-7: No. As defined, international air carrier refers to foreign airline

companies only and does not include domestic airline corporations
with international operation.

Q-8: Will air carriers operating under a government franchise still be

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 required to pay the franchise tax in addition to the VAT?

A-8: No. The VAT is in lieu of the franchise tax.

Q-9: Are the sale, importation or lease of passenger or cargo aircraft,

including engine, equipment and spare parts thereof for domestic or
international transport operations exempt from VAT?

A-9: The sale, importation or lease of passenger or cargo aircraft,

including engine, equipment and spare parts thereof for domestic or
international transport operations is VAT-exempt pursuant to Section
109(2) of the Code, as amended by R.A. 9337.

Q-10: Are importations of fuel, goods and supplies by persons engaged in

international air transport operation exempt from VAT?

A-10: The importation of fuel, goods and supplies for use in the
international air transport operations is VAT exempt. Provided, that
the said fuel, goods and supplies shall be used exclusively or shall
pertain to the transport of goods and/or passenger from a port in the
Philippines directly to a foreign port without stopping at any other
port in the Philippines to unload passengers and/or cargoes loaded in
and from another domestic port; Provided, further, that if any portion
of such fuel, goods or supplies is used for purposes other than that
mentioned in this paragraph, such portion of fuel, goods and supplies
shall be subject to 12% VAT.

Q-11: Are sales of goods, supplies, equipment, fuel and services to persons
engaged in international air transport operation subject to VAT?

A-11: The sale of goods, supplies, equipment, fuel and services (including
leases of property) to the common carrier to be used in its
international air transport operations is zero-rated. Provided, that the
same is limited to goods, supplies, equipment, fuel and services
pertaining to or attributable to the transport of goods and passengers
from a port in the Philippines directly to a foreign port without
docking or stopping at any other port in the Philippines to unload
passengers and/or cargoes loaded in and from another domestic port;
Provided, further, that if any portion of such fuel, equipment, goods
or supplies and services is used for purposes other than that
mentioned in this paragraph, such portion of fuel, equipment, goods,
supplies and services shall be subject to 12% VAT.

Q-12: Are importation of fuel by an air transportation company exclusively

engaged in international operation automatically exempt from VAT?
What about his purchases of fuel from domestic suppliers? Will these

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 purchases automatically qualify as zero rated?

A-12: Direct importations of fuel by an air transportation company

exclusively engaged in international operations are considered VAT
exempt. However, the importer has to secure a VAT-exempt
Authority to Release Imported Goods (ATRIG) from the appropriate
BIR office prior to the release of the imported fuel from the custody
of the Bureau of Customs (BOC).

With respect to its domestic purchases of fuel, considering that the

same are normally loaded directly to the international carrier, the sales
thereof by its suppliers are considered as zero-rated. The seller of the
fuel must issue a zero-rated VAT invoice in the name of the
international carrier and the same must be supported by Delivery
Receipt or any document, evidencing the actual loading of the fuel to
the international carrier/vessel duly acknowledged by its captain or
duly authorized representative.

Q-13: How shall we tax petroleum products imported by/directly sold to air
transportation companies that are engaged in both domestic and
international operations?

A-13: It will depend on the nature of procurement of petroleum products by

these air transport operators:

1. If the transport operators locally procure petroleum products

on a per flight basis, such that the specific purchase of the fuel
can be directly identified to be used by the loading aircraft for
outbound flight, the said sales are zero-rated or the
importation is VAT-exempt. The domestic seller of the fuel
must issue a zero-rated VAT invoice in the name of the carrier
and the same must be supported by Delivery Receipt or any
document evidencing the actual loading of the fuel to the
carrier for outbound international voyage duly acknowledged
by its captain/pilot or duly authorized representative.

2. If the petroleum products are imported/sold in bulk and the

destinations of the aircraft may be known only upon loading
of the fuel to the departing aircraft, such bulk importation
by/direct sales to the transport operators shall be subject to
the 12% VAT. The concerned transport operators can either
utilize the VAT paid on the importation or local purchase of
fuel as credit against their output tax liabilities, or can claim
for tax refund/credit such portion of the VAT payments on
local as well as imported purchases that are attributable to
their zero-rated sales.

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 3. If the transport operator is maintaining dedicated tanks for the
storage of fuel to be used exclusively for international flight,
and the imported/locally purchased petroleum products will be
delivered directly to these dedicated storage tanks upon
release from BOC custody/supplier oil company, the
importation of these fuel by the transport operator shall be
exempt from VAT while the local supply will be subject to
VAT at zero-rate. In both cases, however, the maintenance of
these storage tanks shall be subject to prior approval and
regular monitoring by the BIR. Otherwise, the rule in the
immediately preceding paragraph will apply.

Q-14: Which transactions with international air transport operators are

zero-rated?

A-14: Sale of services to persons engaged exclusively in international air

transport operations, including leases of property for use thereof, and
the sale of goods, supplies, equipment and fuel are zero-rated.
However, sale of goods, supplies, equipment and fuel as well as
services rendered to persons engaged in both domestic and
international operations shall be zero-rated only with respect to the
portion that will be used in their international operations.

Q-15: Who among the air transport operators are required to register as
VAT taxpayer effective November 1, 2005?

A-15: Domestic air carriers with respect to their air transport operations,
whose gross receipts from the transport of passengers, goods and
cargoes for any 12-month period exceed P1,500,000.00 are required
to register as VAT taxpayers.

Q-16: Can passenger or cargo tickets issued (whether manual or

automated) for domestic or international flight/voyage substitute as
VAT official receipts?

A-16: No. VAT-registered domestic air carriers are required to issue VAT
official receipt on their sale of passenger or cargo tickets for both
domestic and international flight/voyage. Airline/Vessel tickets are
considered contracts of carriage and cannot serve as official receipts.
VAT official receipts shall be issued by the domestic air carrier upon
receipt, actual or constructive, of payments from the purchasers.

In the case of tickets sold through agents (general sales agents or

travel agents) of domestic air carriers the agents shall issue the VAT
official receipts of the domestic air carriers (not the agent's own
official receipts), since the seller of tickets are the domestic air
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 carriers and not their agents. The agents merely collect the proceeds
of sale from the buyers on behalf of the domestic air carriers. In order
to comply with this procedure, the domestic air carriers shall maintain
an adequate supply of VAT official receipts with their agents.

The agents shall, in turn, bill the domestic air carriers for their
commissions and the 12% VAT on said commission, if the agents are
VAT-registered or VAT-registrable taxpayers. The VAT official
receipts issued by the agents to the domestic air carriers shall be the
bases of the latter in claiming input taxes on commissions paid to
agents. On the other hand, if the agent is a qualified non-VAT
taxpayer, he shall issue non-VAT official receipt to the domestic
carrier. However, said non-VAT official receipt issued by the agent to
the domestic common carrier cannot generate input tax to the latter.

On the other hand, if the intermediary-entity between the carrier and

the customer purchases in bulk passenger spaces or cargo spaces and
resells the same to the said customer at a price dictated by said
intermediary as evidenced by the issuance of the intermediary's official
receipt and sales invoice/billing statement, a
wholesaler-distributor/retailer relationship is created between the
carrier and the intermediary and they shall be taxed accordingly.

Q-17: If the purchaser of the domestic air ticket refuses to voluntarily

disclose the information that he is a VAT-registered person, will the
seller of the domestic ticket be liable for non-indication in the
official receipt of the required information prescribed under Sec.
113(a) and Sec. 237 of the Code?

A-17: If the purchaser is a regular customer, the seller has no valid excuse
for not knowing whether the purchaser is VAT-registered or not. As
such, it shall be liable for any omission of the prescribed information
in the Receipt to be issued. However, for non-regular customers, the
seller will not be held liable for such omissions. Official receipts
issued to VAT-registered purchasers that do not reflect the
information prescribed under Sections 237 and 113 of the Code will
not be allowed as sources of input tax credits on the part of the
VAT-registered purchasers.

Q-18: How about domestic air tickets sold through electronic ticketing
where no paper value documents are issued, what will serve as VAT
receipt?

A-18: The domestic air carrier should provide for a facility to allow the
buyer to download the information contained in the airline ticket
electronically stored in its computer system and to generate/print an

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 official receipt which shall reflect the information required under
Section 113 and Section 237 of the Code. This particular situation
presupposes that the air carrier has a BIR-approved computerized
accounting system or components thereof that includes the system
that allows the issuance of computer-generated VAT official receipt.
In the absence of such facility, a manual VAT official receipt that
complies with the requirements under Sections 237 and 113 of the
Code shall be issued by the domestic air carrier which shall be the
basis of the VAT-registered buyer in claiming input tax on his
purchase of carriage service.

Q-19: What is the basis of the 12% VAT on the commission of general sales
agents with respect to their sales of domestic air tickets?

A-19: Proceeds on the sale of domestic air tickets do not form part of the
gross receipts of the general sales agent. The same forms part of the
gross receipts of the domestic airline company. The gross receipts of
agents shall pertain to their commission only which is included in the
price of airline tickets. The price of the airline ticket (inclusive of Civil
Aeronautics Board [CAB] approved airfare, fuel surcharge, insurance
surcharge, aviation security fee, terminal fee, etc.) plus the 12% VAT
passed on by the domestic air carrier (seller) to the buyer shall be
collected by the agent on behalf of the domestic air carrier. The agent
shall remit to the carrier the following: the price of the airline tickets
(less the agent's commission); the 12% VAT (less the VAT accruing
on the agent's commission); and the 10% creditable withholding of
income tax on agent's commission.

Example: PAL sold domestic airline ticket at P1,000.00 through its

general sales agent (agent's commission is 3.5%). Shown
herein-below is the computation:

Buyer
Top 10,000 Others
Corporation

Price of Airline Ticket P1,000.00 P1,000.00

Add: 12% VAT 120.00 120.00
–––––––– ––––––––
Sub-Total P1,120.00 P1,120.00
Less: 2% Withholding Tax (20.00)
––––––––
Total Amount Collected from Buyer P1,100.00 P1,120.00
Less: Agent's Commission (35.00) (35.00)
12% VAT on Commission (4.20) (4.20)
–––––––– ––––––––
Sub-Total P1,060.80 P1,080.80
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 Add: 10% Withholding of Income Tax on 3.50 3.50
Agent's Commission –––––––– ––––––––
Amount to be remitted by the Agent to PAL P1,064.30 P1,084.30
======== ========

The agent shall remit to the BIR the 12% VAT accruing on its
commission, net of input taxes incurred by the agent.

For buyers classified as belonging to the Top Ten Thousand (10,000)

private corporations, they have to deduct and withhold 2% on their
payments for domestic air tickets and issue a Certificate of Creditable
Tax Withheld at Source (BIR Form 2307) in the name of the
domestic air carrier as the income recipient. The latter shall in turn
issue BIR Form 2307 to the agent for the 10% creditable withholding
tax withheld from the agent's commission, in the name of the agent as
the income recipient of the commission.

If the domestic airline ticket was sold by a sub-agent of the general

sales agent (GSA) of a domestic air carrier, the amount to be remitted
by the sub-agent to the GSA will depend on whether the sub-agent is
VAT-registered or not as illustrated below:
VAT Non-VAT
registered registered
Sub-agent Sub-agent

Total Amount Collected from Buyer P1,120.00 P1,120.00

(inclusive of 12% VAT)
Less: Sub-agent's commission (2%) (20.00) (20.00)
12% VAT on commission (2.40) -
–––––––– ––––––––
Sub-Total P1,097.60 P1,100.00
Add: 10% W/Tax on Sub-Agent's
Commission 2.00 2.00
––––––––– –––––––––
Amount to be remitted to GSA P1,099.60 P1,102.00
======== ========

The GSA shall issue BIR Form 2307 to the sub-agent for the 10%
creditable withholding tax on the sub-agent's commission.

Sub-agents of a GSA shall present proofs of their BIR registration

(whether VAT or non-VAT) to the GSA for verification purposes.

For the commission and the corresponding output VAT on

commission withheld by the GSA/sub-agents from their remittances
to the domestic air carrier/GSA, the GSA/sub-agents shall issue a
receipt (be it a Non-VAT receipt, if the agent is non-VAT registered,
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 or a VAT-receipt, if the agent is VAT-registered) to the domestic air
carrier/GSA. The amount deducted from the remittable amount to the
domestic air carrier/GSA shall be net of the creditable withholding of
income tax on the agent/sub-agent's commission which should be
remitted by the domestic air carrier/GSA to the BIR.

The VAT official receipt issued by the GSA/sub-agents shall be the

basis for the domestic air carrier/GSA in claiming input taxes on the
commission.

Q-20: Will a non-VAT registered agent be liable for VAT as a result of the
12% VAT passed on to buyers of domestic airline ticket?

A-20: No. The 12% VAT on the sale of domestic airline ticket is passed on
to the buyer by the seller which is the domestic air carrier. The agent
collects the payment for the domestic airline ticket plus the 12% VAT
on behalf of the domestic air carrier. The non-VAT registered ticket
agent shall be liable to three percent (3%) tax on his gross receipts of
commission pursuant to Sec. 116 of the Code, provided his gross
annual receipts do not exceed P1,500,000. The non-VAT registered
agent shall issue non-VAT receipt to the domestic air carrier which is
the agent's real customer, which non-VAT receipt, of course, cannot
generate input tax to the domestic air carrier.

Q-21: In case of refund of domestic air ticket fare, including the 12% VAT,
to the purchaser for unused carriage or service, can the domestic air
carrier-seller deduct the VAT previously remitted to the BIR against
its VAT liability for the succeeding return period?

A-21: The domestic air carrier-seller, making a refund to the purchaser of

domestic air ticket shall require the latter to surrender the unused
flight coupon which shall be the basis for the seller to record "Sales
Returns" and deduct the 12% VAT previously remitted to the BIR on
the refunded ticket against its output tax liability during the
month/quarter when the refund was made. A summary list of tickets
refunded containing the name, TIN, address of the purchasers,
domestic airline ticket number, and the amount refunded including the
VAT, shall be prepared by the domestic air carrier-seller on a monthly
basis but submission thereof shall be done quarterly, together with the
quarterly VAT return.

Q-22: How much should be the passed-on VAT for services rendered to the
government, its political subdivisions, instrumentalities or agencies
including government-owned or controlled corporations (GOCCs)?

A-22: The passed-on VAT for the services rendered to the government, its

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 political subdivisions, instrumentalities or agencies including GOCCs
shall be 12%. However, the government or any of its political
subdivisions, instrumentalities or agencies, including GOCCs shall,
before making payment on account of each purchase of goods and/or
services taxed at 12% VAT pursuant to Sections 106 and 108 of the
Code, deduct and withhold a final VAT at the rate of five percent
(5%) of the gross payment thereof.

The five percent (5%) final VAT withholding rate shall represent the
net VAT payable of the seller. The remaining seven percent (7%)
effectively accounts for the standard input VAT for sales of goods or
services to government or any of its political subdivisions,
instrumentalities or agencies including GOCCs, in lieu of the actual
input VAT directly attributable or ratably apportioned to such sales to
the Government. Should actual input VAT exceed the standard input
VAT of seven percent (7%) of gross payments, the excess may form
part of the sellers' expense or cost. Conversely, if actual input VAT is
less than the standard input VAT of 7% of gross payment, the
difference must be closed to expense or cost.

Q-23: Are sale of tickets to the government, its political subdivisions,

instrumentalities or agencies including GOCCs, by a Domestic
Airline with international operations to cover transport of
passengers and/or cargoes from the Philippines to a foreign country
and vice versa, subject to the 5% final VAT withholding?

A-23: No. The final withholding VAT is only a procedure for collecting the
VAT from government money payments and will be imposed only if
the service to be rendered is subject to the 12% VAT. The transport
services from the Philippines to a foreign country is subject to VAT at
0% while the transport services from any foreign country to the
Philippines is exempt from VAT due to lack of tax jurisdiction.
Accordingly, the sale of tickets to the government representing
services which are either zero-rated or exempt are not subject to the
final VAT withholding.

Q-24: If the country of registry of the international air carrier purchasing

locally the petroleum product does not grant similar tax treatment to
Philippine-registered carriers, are we still going to treat the sale of
these products as zero-rated for VAT purposes?

A-24: Yes. Unlike the provisions of Section 135 of the Code with respect to
the imposition of excise taxes on petroleum products, the provision of
the new VAT law treating the direct sales of petroleum products to
airline companies engaged in international operations as zero-rated
did not make any distinction. As such, the rule on reciprocity on these

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 sales will not apply.

Q-25: What is the basis in the computation of output VAT on sale of

services of the airline company?

A-25: The basis in the computation of output VAT of an airline company is

its gross receipts as defined in this Circular.

Q-26: When a Philippine airline company whose carrier carries cargo from
a foreign port to the Philippines and transships it on a domestic
registered air carrier bound for another Philippine port, is the
income derived therefrom subject to VAT?

A-26: Only the portion where the cargo is carried by a domestic air carrier
from one Philippine port to another Philippine port is subject to VAT
which is assessed on and payable by the Philippine company/domestic
airline company.

Q-27: What are the consequences if the domestic airlines companies failed
to register as VAT taxpayers?

A-27: Non-registration as VAT taxpayers does not exempt said companies

from their output tax liability on their sales of service and other
taxable transactions. However, in computing their VAT payable for
the period, no input tax credits on their purchases of goods,
properties or services prior to registration shall be allowed to be
credited against their output tax liability.

Q-28: Are other income of domestic airline companies earned on cancelled

tickets subject to VAT?

A-28: All related income such as penalty or charges earned on the

cancellation of tickets by the clients of domestic airline companies are
subject to VAT.

Q-29: Can a taxpayer whose main/principal line of business is subject to

VAT and therefore VAT-registered, likewise register under the VAT
its secondary lines of business which are exempt from VAT under
Section 109 of the Tax Code?

A-29: Yes. Section 109(2) of the Tax Code provides — "A VAT-registered
person may elect that Subsection (1) [referring to exempt
transactions] not apply to its sale of goods or properties or services".
Perforce, if the main/principal line of business is subject to VAT and
the taxpayer engaged thereon is VAT-registered, said taxpayer may
elect that all his exempt transactions will be placed within the VAT
system.
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 Q-30: Can an international airline company who is engaged in other
activities subject to VAT, i.e., leasing of properties, etc., elect that all
its business activities be subject to VAT?

A-30: No. The main or principal business of an international airline company

is VAT-exempt because the same is subject to the percentage tax
under Title V of the Tax Code. Therefore, the international airline can
not elect that its exempt principal business be subject to VAT even if
its secondary businesses are subject to VAT.

Q-31: How do we determine the main or principal business of a taxpayer

who is engaged in mixed business activities?

A-31: In determining the main or principal business of a taxpayer, we apply

the pre-dominance test. Under this test, if more than fifty percent
(50%) of its gross sales and/or gross receipts comes from its
business/es subject to VAT, its main/principal business falls within the
VAT system making its status as a VAT person. Otherwise, he can
not be considered as a VAT person eligible for the election provided
for under Section 109(2) of the Tax Code.

All internal revenue officers and others concerned are hereby enjoined to
strictly implement the provisions of this Circular.

(SGD.) LILIAN B. HEFTI

Commissioner of Internal Revenue

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