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Philippines: tax relief half measures will have no effect for foreign airlines

Luc Citrinot, eTN  Jul 27, 2011

MANILA, Philippines (eTN) - They fought bitterly during several years to see it abolished. In 1998, the Filipino government introduced a new set of highly discriminatory taxation: foreign carriers had to pay a 3% “common carrier tax” on their average revenues and pay another 2.5% for the gross Philippine billings tax (GPBT). The 2.5% tax is taken on any cargo and passenger revenues originating from the Philippines in an uninterrupted flight. All of these taxes are even now submitted to a 12% VAT. Foreign shipping and cruise lines are also subject to the same taxation.

There has been a wave of protests in recent years as local carriers are all exempted from it. The Philippines taxation on air transport is even illegal when considering international trade agreements. The International Civil Aviation Organization (ICAO), which enacts laws and rules valid for air transport, clearly indicates that international air transport is NOT subject to taxation – especially VAT - and that there can’t be any difference in treatment between local and international carriers serving the same destination. The tax brings however over US$75 million annually into the government’s coffers.

The Philippines move to impose more charges on foreign airlines had already severe consequences for the destination. With the taxation coming into force, the discriminating regulation has turned into a major handicap for overseas carriers to fly into the Philippines. Operating long-haul flights with higher ticket prices, they are forced to "stump up" high taxes on gross revenues. Since the nineties, many airlines pulled out from Manila including Aeroflot, Alitalia, Air France, British Airways, Egypt Air, Lufthansa, Pakistan Airlines, and Vietnam Airlines.

During a hearing on his budget 2011 at the House of Representatives last year, Tourism Secretary Alberto Lim admitted that the poor performance for international tourist arrivals could likely be also attributed to the Common Carrier Tax, Gross Philippine Billing Tax, and also customs overtime charges. “We are the only country in the world that implements this system. This forces American and European airlines to withdraw their flights, because they found better opportunities in other countries,” the Tourism Secretary was quoted as saying. KLM already threatened many times to withdraw from the Philippines if nothing changed. The carrier is the only one today to offer direct flights to Europe.

Last January, the European Chamber of Commerce of the Philippines (ECCP) called on the government to scrap the “onerous” taxes, arguing that more airlines from Europe would then consider flying to the Philippines, which would support the government’s programs to increase tourist arrivals. But the government’s compromise on taxation, passed at the end of last week, will probably not change anything in the short term. The new rules will allow foreign airlines to calculate their 3% tax from billings, a measure which will help them to pass on the additional cost to passengers.

Foreign carriers serving the Philippines already protest that the measure does not address their complaint: the complete abolition of a discriminatory taxation to foreign companies or its extension to local carriers. John D. Forbes, AmCham legislative committee chairman of the American Chamber of Commerce in the Philippines (AmCham), indicated in a message that the government move “was missing the point and perpetuates the unlevel [sic] playing field between Philippine and foreign carriers. This decision will not help tourism and seems likely to discourage new airline service into the country by taxing their passengers directly,” he explained.

Most foreign airlines are in favor of helping promoting the Philippines in a bid to increase the total number of seats to the country and bring consequently more tourists. In a recent interview, Steven Crowdey of Delta Airlines highlighted that the Philippines was the only country in the region to look at imposing more taxes on air carriers. “In neighboring countries, airports and agencies often offer incentives for carriers to fly,” he said.

Calculating from IATA's study on tax elimination, ECCP highlighted that during the first year of the elimination of the tax contribution on foreign airlines, total international movements could increase by 230,000 passengers, up by 2%. It would eventually lead to potential revenue gains of US$38 to US$78 million for the Philippines’ economy. Indirect tourism revenues could then represent a gain of over US$200 million for the country and help create 70,000 additional jobs in services. One thing is, however, sure: rising fares to compensate taxes will certainly not bring more tourists to the country.

Philippines: tax relief half measures will have no effect for foreign airlines
Unlikely to smile to new rules on taxing foreign airlines in the Philippines / Photo by L. Citrinot

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