The Philippine government has granted certain tax privileges to major domestic airlines, including Philippine Airlines (PAL) and Cebu Pacific, under their respective legislative franchises. These privileges include exemption from value-added tax (VAT) on the importation of aircraft, aircraft equipment, engines, machinery, spare parts, and accessories.
According to Presidential Decree No. 1590, dated 11 June 1978, PAL is granted tax privileges, including VAT exemption on the importation of aircraft and related equipment. Similarly, the Bureau of Internal Revenue (BIR) recognized Cebu Pacific’s entitlement to VAT exemption on importing aircraft, engines, equipment, and spare parts under Republic Act No. 7151, dated 30 August 1991.
These franchise-based exemptions illustrate the traditional treatment of tax privileges in the Philippine aviation industry, where a legislative franchise served as an important basis for an airline’s entitlement to certain tax incentives. The VAT exemption on aircraft imports in the Philippines is significant, as planes are capital assets essential to the operation, expansion, and modernization of air transport services.
Philippine tax law recognizes this distinction by exempting from VAT the sale, import, or lease of passenger or cargo aircraft, including their engines, equipment, and spare parts, when used for domestic or international operations. By reducing the tax burden on aircraft acquisition, the exemption makes it economically feasible for airlines to acquire additional planes, modernize fleets, and expand operations.
Historically, the tax privileges of major domestic airlines, such as PAL and Cebu Pacific, were tied to their legislative franchises, creating a misconception that only franchised airlines could claim exemptions. However, amendments to the National Internal Revenue Code (NIRC) removed franchise dependency for VAT exemption on aircraft imports.
The NIRC now exempts from VAT the sale, import, or lease of passenger or cargo vessels and aircraft, including engines, equipment, and spare parts, when used for domestic or international operations. The statutory language attaches the exemption to the nature of the transaction and the use of the aircraft, rather than on the possession of a legislative franchise.
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The absence of a legislative franchise does not, by itself, negate the statutory VAT exemption provided under the NIRC. A domestic airline without a legislative franchise may apply for VAT exemption on imports of qualifying aircraft, engines, equipment, and spare parts, subject to compliance with NIRC requirements and the applicable regulatory and documentary requirements.
The regulatory framework governing air transport operations must likewise be considered. The Philippine Congress has delegated its licensing authority in the aviation industry to the Civil Aeronautics Board (CAB). The CAB has regulatory authority over air transport and may issue appropriate certificates and permits to qualified carriers.
The Department of Finance identifies the Certificate of Public Convenience and Necessity (CPCN) as one of the documentary requirements for an application for VAT exemption covering the import of aircraft, engines, equipment, and spare parts under the NIRC. The CPCN should not be regarded as the source of the VAT exemption itself, but rather as regulatory evidence of an airline’s authority to engage in air transport operations.
Understanding the tax privileges available to airlines in the Philippines requires recognizing the distinction between VAT exemption and customs duty exemption. Customs duty exemptions have a separate legal basis and may have additional requirements. This distinction is important in the context of aircraft imports and their impact on the aviation industry.
They are essential for the operation, expansion, and modernization of air transport services.
It is also worth noting that the tax privileges granted to airlines can have a significant impact on their operations and expansion plans. The exemption from VAT on aircraft imports can make it more economically feasible for airlines to acquire new planes and expand their services.
