VAT and Withholding Tax for Airline and their Agents

Tax rules for domestic airlines, their sales agents and clients

by Lina P. Figueroa
Tax rules for domestic airlines, their sales agents and clients
Revenue Memorandum Circular (RMC) No. 46-08, issued by the Bureau of Internal Revenue (BIR) last June 20, clarified a number of issues relating to VAT and withholding tax for airline companies and their sales agents. The circular, in the process, also provided guidance for numerous companies purchasing airline tickets and transacting with such sales agents, including travel agents.
Domestic airlines are VATable at 12% on their receipts from transport of passengers, goods or cargoes to and from places within the Philippines, including on transactions incidental to their air transport operations.
Gross receipts from international operations are either exempt or zero-rated. Outbound transport is zero-rated following the destination principle, while inbound is VAT-exempt since the transport service is rendered outside the Philippines.
The VAT shall be in lieu of the franchise tax which used to be imposed on air carriers operating under a government franchise.
Sales agents of domestic airlines
General sales agents (GSA) are subject to VAT and 10% creditable withholding tax (CWT) on the commission paid by the airline companies.
Since the GSA is simply collecting the proceeds from the ticket sales on behalf of the airline companies, such proceeds, therefore, will not form part of the agent’s gross receipts, whether for purposes of VAT or income tax.
The GSA should remit to the airline company the proceeds from ticket sales minus his commission. As he has control over the payment, the GSA also remits to the airline company the 10% CWT on his commission which the airline company is liable to remit to the BIR.
In effect, what the GSA will keep from the proceeds of the ticket sales is its sales commission inclusive of VAT less the 10% CWT which the airline company will remit to the BIR.
The GSA shall issue an official receipt (OR), whether VAT or non-VAT, for the gross commission received. The airline company shall issue a CWT certificate to the agent for the tax withheld on the commission.
Invoicing for domestic airline tickets
Domestic airlines are required to issue VAT ORs on their sale for both domestic and international flights. The OR should indicate the amount of VAT or VAT zero-rated/VAT-exempt, as applicable. The passenger or cargo tickets cannot take the place of VAT ORs.
If tickets are sold through GSAs, including travel agents, the agents should still issue the VAT OR of the airline company, not the agent’s own official receipts.
However, agents purchasing passenger or cargo spaces in bulk and reselling these at their own price shall be treated as distributors, and the proceeds from ticket sales shall be treated as their gross receipts for VAT and income tax. As sellers, they should issue their own ORs for such sales.
For sale of air tickets through electronic ticketing, domestic air carriers should provide for a facility that will allow electronic issuance of the OR. In the absence of such facility, domestic airlines are still required to issue VAT official receipts manually.
Compliance with these invoicing requirements could be a serious concern for airline companies, especially the consequence of having to entrust invoicing to their agents.
Lookout of buyers of airline tickets
Companies buying airline tickets through GSAs and travel agents have been asking for clarification on how much to withhold and how much input VAT to accrue. The rules may be clearer now:

1. Airline tickets can only generate input VAT if these are for domestic travel.

2. The buyer is bound to get an OR issued by the airline company even if he buys the tickets from a GSA or a travel agent. There should be a VAT in that OR if the ticket is for domestic travel. International travel, whether inbound or outbound, will not generate input VAT - it is either VAT-exempt or zero- rated.

3. The circular mentions that top ten thousand corporations (TTCs) are liable to withhold from airline companies on ticket purchases. In turn, they should issue a CWT certificate to the airline company.
Though it was not mentioned, a 2% CWT may also be withheld from domestic airlines for transport of cargoes if gross payment exceeds P2,000 per month. Domestic airlines are considered common carriers subject to the 2% CWT on transportation contractors.

4. If the agent issues its own OR, there should still be a VAT component. Though the circular did not specify, TTC corporate buyers should still withhold the 2% CWT but, this time, the certificate should be issued to the agent. It was not clarified if non-TTC buyers are liable to withhold on other services billed by travel agents, other than ticket sales.
The circular also answered questions on the VAT treatment of purchases of fuel, supplies, and services by airlines, as well as their sales to government. Intentionally or unintentionally, the circular left out the withholding rules for international airlines. Taxation of off-line international carriers is another area that needs further clarification. These, notwithstanding, it is good to note that BIR has been exerting efforts to deal with them.