ASG Law

Tag: NIRC Section 135

  • Excise Tax Exemption: Protecting International Carriers and Upholding International Agreements

    In a significant ruling, the Supreme Court affirmed that Pilipinas Shell Petroleum Corporation is entitled to a refund or tax credit for excise taxes paid on petroleum products sold to international carriers. This decision underscores the Philippines’ commitment to international agreements, specifically those concerning aviation fuel, and ensures that international carriers are not indirectly burdened by excise taxes. The ruling protects the competitiveness of the Philippine economy and tourism industry by preventing retaliatory actions from other countries.

    Fueling International Comity: Can Excise Taxes Be Passed to International Carriers?

    The heart of this case revolves around the interpretation of Section 135(a) of the National Internal Revenue Code (NIRC) and its implications for international carriers purchasing petroleum products in the Philippines. Pilipinas Shell sought a refund for excise taxes it paid on petroleum products sold to international carriers, arguing that these sales were exempt from such taxes. The Commissioner of Internal Revenue (CIR) contested this claim, asserting that excise taxes are levied on the manufacturer or producer, regardless of who the end purchaser is. The CIR argued that the exemption under Section 135 of the NIRC only prevents manufacturers from directly passing the excise tax on to international carriers, but does not entitle the manufacturers to a refund.

    The Supreme Court, however, sided with Pilipinas Shell, emphasizing the importance of upholding international agreements and the principle of international comity. This principle suggests that nations should respect each other’s laws and judicial decisions out of mutual courtesy. The Court referenced the Chicago Convention, which established the legal framework for international civil aviation, and the standard practice of bilateral air service agreements (ASAs) that exempt airlines from national taxes and customs duties on fuel. To better understand the context, it’s helpful to consider the relevant provision of the NIRC:

    Section 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies. – (a) Petroleum products sold to the following international carriers of Philippine or foreign registry shall be exempt from excise tax: (1) International air carriers; (2) International shipping carriers.

    Building on this principle, the Supreme Court considered the economic implications of denying domestic manufacturers a refund for excise taxes paid on petroleum products sold to international carriers. The Court noted that if manufacturers were forced to absorb these costs, they might be less willing to sell to international carriers, or they might increase prices to compensate for the tax burden. This could lead to a practice called “Hankering,” where international carriers purchase fuel elsewhere, negatively impacting the Philippine economy and tourism industry.

    The Court highlighted the potential for retaliatory actions from other countries if the Philippines did not honor its commitments under international agreements. This is because many bilateral agreements include provisions for tax exemptions on aviation fuel. By denying the refund, the Philippines would be effectively imposing a tax on international carriers, which could violate these agreements and lead to reciprocal measures from other nations.

    In its decision, the Supreme Court invoked the doctrine of stare decisis, which means “to stand by things decided.” This doctrine requires courts to follow precedents set in previous similar cases. The Court relied heavily on its earlier ruling in Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corporation (G.R. No. 188497), which involved similar facts and legal issues. In that case, the Court ultimately ruled in favor of Pilipinas Shell, holding that the company was entitled to a refund of excise taxes paid on petroleum products sold to international carriers.

    The CIR also argued that certain BIR rulings and regulations allowing tax refunds for excise taxes paid on petroleum products sold to tax-exempt entities should be declared invalid. However, the Court rejected this argument, finding that the CIR failed to demonstrate the specific provisions of these issuances that were allegedly contrary to law. Furthermore, the Court noted that one of the rulings cited by the CIR actually involved Petron Corporation, which was not even a party to the present case. The Court also found that another regulation cited by the CIR pertained to the general rules for issuing tax credit certificates, not specifically to refunds of excise taxes on petroleum products.

    The impact of this ruling extends beyond Pilipinas Shell. It clarifies the application of excise tax exemptions for petroleum products sold to international carriers and reinforces the Philippines’ commitment to international agreements. It protects the Philippine economy and tourism industry by ensuring that international carriers are not unfairly burdened with taxes, potentially leading them to seek fuel elsewhere. This also upholds the intent of Section 135(a) of the NIRC, ensuring that the exemption applies at the point of production, rather than merely preventing the direct passing of taxes to international carriers. This ensures that the tax exemption effectively benefits international carriers and aligns with international practices and agreements.

    FAQs

    What was the central legal question in this case? The key issue was whether Pilipinas Shell was entitled to a refund of excise taxes paid on petroleum products sold to international carriers, given the tax exemption provided under Section 135(a) of the NIRC.
    What is the principle of international comity? International comity is the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.
    What is the significance of the Chicago Convention in this case? The Chicago Convention established the legal framework for international civil aviation. Article 24(a) provides that fuel on board an aircraft of a contracting state is exempt from customs duty and similar charges, influencing the court’s view on tax exemptions for international carriers.
    What is the doctrine of stare decisis? Stare decisis is a legal doctrine that obligates courts to follow precedents set in previous similar cases. This ensures consistency and predictability in the application of the law.
    Why did the CIR argue against the tax refund? The CIR contended that excise taxes are levied on the manufacturer regardless of the purchaser, and the exemption only prevents passing the tax on to international carriers, not a refund.
    What potential economic consequences did the court consider? The court considered that denying the refund could lead to “Hankering,” where international carriers purchase fuel elsewhere, negatively impacting the Philippine economy and tourism industry. Retaliatory actions by other countries were also possible.
    What was the basis for the court’s decision to grant the refund? The court based its decision on the need to uphold international agreements, the principle of international comity, and the economic implications of denying the refund. It also relied on the doctrine of stare decisis, following a similar ruling in a previous case.
    What are the implications of this ruling for other petroleum companies? The ruling benefits other petroleum companies in similar situations, as it sets a precedent for tax refunds on petroleum products sold to international carriers and establishes the tax exemption at the point of production.
    What specific provision of the NIRC is central to this case? Section 135(a) of the NIRC, which provides an excise tax exemption for petroleum products sold to international carriers of Philippine or foreign registry.

    In conclusion, this Supreme Court decision reaffirms the Philippines’ commitment to its international obligations and ensures a level playing field for international carriers operating within the country. By granting the tax refund, the Court protects the competitiveness of the Philippine economy and tourism sector, while upholding the principles of fairness and international comity.

    For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

    Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
    Source: Commissioner of Internal Revenue vs. Pilipinas Shell Petroleum Corporation, G.R. No. 180402, February 10, 2016

  • Excise Tax and International Carriers: Clarifying Refund Entitlement for Domestic Petroleum Manufacturers

    The Supreme Court, in a pivotal resolution, granted Pilipinas Shell Petroleum Corporation’s motion for reconsideration, affirming the Court of Tax Appeals’ decision. The ruling allows Pilipinas Shell to claim a refund or tax credit for excise taxes paid on petroleum products sold to international carriers. This decision clarifies that domestic petroleum manufacturers are entitled to a refund of excise taxes on petroleum products sold to international carriers, aligning with international agreements and promoting the viability of international air travel. This outcome ensures that domestic manufacturers are not unduly burdened, supporting the country’s commitment to international aviation standards and economic growth.

    Fueling Flights and Fairness: Who Bears the Excise Tax Burden in International Aviation?

    This case revolves around the interpretation of Section 135(a) of the National Internal Revenue Code (NIRC) concerning excise tax exemptions on petroleum products sold to international carriers. Pilipinas Shell Petroleum Corporation (PSPC) sought a refund for excise taxes it paid on aviation fuel sold to international airlines, arguing that these sales are exempt from excise tax under the NIRC. The Commissioner of Internal Revenue (CIR) initially denied the refund, contending that the tax exemption applies only to the international carriers, preventing PSPC from passing on the tax burden, but not entitling them to a refund. The Supreme Court’s initial decision supported the CIR’s view, but PSPC’s motion for reconsideration prompted a reevaluation of the issue, considering international agreements and the broader implications for the domestic oil industry.

    The central legal question is whether the excise tax exemption under Section 135(a) of the NIRC applies to the petroleum products themselves, thus entitling the domestic manufacturer to a refund, or solely to the international carriers, prohibiting the shifting of the tax burden. Excise taxes in the Philippines, as defined under Section 129 of the NIRC, are taxes imposed on goods manufactured or produced in the Philippines for domestic sale or consumption, or imported items. These taxes fall into two categories: specific tax, based on weight or volume, and ad valorem tax, based on the selling price. Aviation fuel is subject to a specific tax under Section 148(g) of the NIRC, which takes effect “as soon as they are in existence as such.”

    Associate Justice Lucas P. Bersamin clarified the traditional meaning of excise tax, noting its evolution from a tax on privileges to a tax on specific goods or articles. The case of Petron Corporation v. Tiangco elucidates this transformation, stating that excise tax has morphed from the Am Jur definition to its current signification, which is a tax on certain specified goods or articles. This evolution is crucial in understanding the present application of excise tax laws. Previously, excise tax was seen as a tax on the privilege to import, manufacture, and remove certain articles. Currently, it is understood as a direct tax on specified goods, influencing how exemptions are interpreted and applied.

    The Supreme Court, in reconsidering its stance, acknowledged the importance of international agreements, particularly the 1944 Chicago Convention on International Aviation. Article 24 of the Convention has been interpreted to prohibit the taxation of aircraft fuel consumed for international transport. The Court recognized that Section 135(a) of the NIRC and earlier amendments to the Tax Code represent the government’s compliance with the Chicago Convention and air transport agreements. It stated that the rationale for exempting fuel from national and local taxes is to recognize the uniqueness of civil aviation and avoid multiple taxation, which could hinder the development of international air transport.

    The Court emphasized the principle of pacta sunt servanda, highlighting the duty to fulfill treaty obligations in good faith, necessitating the harmonization of national legislation with treaty provisions. The court initially interpreted Section 135(a) as prohibiting domestic manufacturers from passing the excise tax on to international carriers. However, it reexamined the effect of denying domestic manufacturers’ claims for refunds on excise taxes already paid, recognizing serious implications for the government’s commitment to the Chicago Convention.

    Concerns were raised that denying refunds could lead to “tankering,” where carriers fill their aircraft as much as possible in low-tax jurisdictions to avoid paying taxes, thereby increasing fuel consumption and emissions. The Court noted the potential adverse effects on the Philippines’ economy and tourism industry, as well as the risk of retaliatory action under bilateral agreements. The Court ultimately found merit in PSPC’s motion for reconsideration, holding that PSPC, as the statutory taxpayer directly liable to pay the excise tax, is entitled to a refund or credit for excise taxes paid on petroleum products sold to international carriers.

    Justice Bersamin, in his separate opinion, concurred with the result but differed in the interpretation of the excise tax exemption. He argued that the exemption under Section 135(a) is conferred on the petroleum products themselves, given their nature as property subject to tax, with the liability statutorily imposed on the domestic petroleum manufacturer. He reasoned that the excise tax attaches to the goods upon the accrual of the manufacturer’s direct liability. He maintained that the subsequent sale to international carriers confirms the proper tax treatment of the goods as exempt from excise tax. He noted that Article 24(a) of the Chicago Convention clearly confers the tax exemption on the aviation fuel on board international carriers. This ensures that fuel taken on board for consumption by an aircraft from a contracting state is exempt from all customs or other duties.

    Bersamin clarified that the option of shifting the tax burden rests on the statutory taxpayer, and that regardless of who bears the tax payment, the proper party to seek a refund of an indirect tax is the statutory taxpayer. He pointed to the Silkair rulings, which firmly hold that the manufacturer-seller is the proper party to claim the refund of excise taxes paid. He also noted that Section 135(a) cannot be construed as granting the excise tax exemption to the international carrier, as the carrier has not been subjected to the excise tax at the outset.

    In conclusion, the Supreme Court’s resolution in Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corporation clarifies the entitlement of domestic petroleum manufacturers to claim refunds for excise taxes paid on petroleum products sold to international carriers. This decision aligns with international agreements, promotes fairness, and supports the economic viability of the domestic oil industry while upholding the Philippines’ commitments to international aviation standards.

    FAQs

    What was the key issue in this case? The key issue was whether Pilipinas Shell, as a domestic petroleum manufacturer, was entitled to a refund of excise taxes paid on petroleum products sold to international carriers. This hinged on the interpretation of Section 135(a) of the NIRC and its alignment with international aviation agreements.
    Who is directly liable for the excise tax on petroleum products? The domestic manufacturer or producer of the petroleum products is directly liable for the excise tax. This liability accrues as soon as the products are in existence and intended for domestic sale or consumption.
    What does Section 135(a) of the NIRC state? Section 135(a) of the NIRC exempts petroleum products sold to international carriers of Philippine or foreign registry for their use or consumption outside the Philippines from excise tax. These products must be stored in a bonded storage tank and disposed of according to regulations.
    What is the Chicago Convention on International Aviation? The Chicago Convention is a 1944 international agreement that establishes the legal framework for international civil aviation. Article 24 of the Convention prohibits the taxation of aircraft fuel consumed for international transport.
    What is the principle of pacta sunt servanda? Pacta sunt servanda is a basic international law principle that means agreements must be kept. It underscores the duty of nations to fulfill their treaty obligations in good faith.
    Why did the Supreme Court initially deny the refund? The Supreme Court initially denied the refund based on the interpretation that the excise tax exemption under Section 135(a) applied only to the international carriers. This prevented Pilipinas Shell from passing on the tax burden but did not entitle them to a refund.
    What prompted the Supreme Court to reconsider its decision? The Supreme Court reconsidered its decision after Pilipinas Shell filed a motion for reconsideration, arguing that the denial of the refund would adversely impact the domestic oil industry. The court also took into account the Philippines’ obligations under international aviation agreements.
    What was Justice Bersamin’s separate opinion? Justice Bersamin agreed with the result but differed in the interpretation, arguing that the excise tax exemption is conferred on the petroleum products themselves. He viewed the excise tax as a tax on property, with liability imposed on the manufacturer.
    What is the significance of the Silkair rulings in this case? The Silkair rulings establish that the proper party to claim a refund of excise taxes paid is the manufacturer-seller. This reaffirms that despite shifting the tax burden, the statutory taxpayer (manufacturer) is entitled to claim a refund.
    What is “tankering” and why is it a concern? Tankering is the practice of airlines filling their aircraft with as much fuel as possible in low-tax jurisdictions to avoid paying taxes in higher-tax locations. This is a concern because it increases fuel consumption and emissions, counteracting environmental goals.

    In summary, this landmark decision not only clarifies the application of excise tax exemptions for petroleum products sold to international carriers but also reinforces the Philippines’ commitment to fulfilling its international obligations. By allowing domestic manufacturers to claim refunds for excise taxes paid, the Supreme Court has ensured a more equitable and sustainable framework for the aviation industry. This decision supports economic growth while adhering to global standards.

    For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

    Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
    Source: COMMISSIONER OF INTERNAL REVENUE vs. PILIPINAS SHELL PETROLEUM CORPORATION, G.R. No. 188497, February 19, 2014

  • Excise Tax Refunds: Who Can Claim for Petroleum Products Sold to International Carriers?

    Excise Tax Refunds: Only the Statutory Taxpayer Can Claim, Not the One Who Bears the Burden

    Exxonmobil Petroleum and Chemical Holdings, Inc. – Philippine Branch vs. Commissioner of Internal Revenue, G.R. No. 180909, January 19, 2011

    Imagine an international airline purchasing jet fuel in the Philippines. Excise taxes are levied on petroleum products, but international carriers are often exempt. If the airline doesn’t buy directly from the manufacturer, who can claim the refund for those taxes? This seemingly simple question has significant implications for businesses involved in the sale and distribution of petroleum products. In this case, ExxonMobil sought a refund for excise taxes on fuel sold to international carriers, taxes initially paid by the manufacturers and passed on to ExxonMobil. The Supreme Court clarified that only the statutory taxpayer, the entity directly liable for the tax, can claim a refund, even if the economic burden is shifted to another party.

    Understanding Excise Taxes and Exemptions

    Excise taxes are imposed on specific goods manufactured or produced in the Philippines for domestic sale or consumption, as stated under Title VI of the National Internal Revenue Code (NIRC). These taxes are levied when two conditions are met: the goods belong to the categories listed in Title VI, and they are intended for domestic sale or consumption, excluding exports. However, Section 135 of the NIRC provides exemptions, particularly for petroleum products sold to international carriers. The specific provision states:

    SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies. – Petroleum products sold to the following are exempt from excise tax:

    (a) International carriers of Philippine or foreign registry on their use or consumption outside the Philippines: Provided, That the petroleum products sold to these international carriers shall be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner;

    This exemption aims to support international trade and transportation by reducing the tax burden on international carriers. However, the application of this exemption becomes complex when the products pass through multiple parties before reaching the international carrier.

    The ExxonMobil Case: A Detailed Breakdown

    ExxonMobil, a foreign corporation operating in the Philippines, purchased Jet A-1 fuel from Caltex and Petron, who paid the excise taxes. These taxes were then passed on to ExxonMobil as part of the purchase price. ExxonMobil subsequently sold this fuel to international carriers, claiming an exemption from excise taxes for these sales. The company then sought a refund of the excise taxes, leading to a dispute with the Commissioner of Internal Revenue (CIR).

    • Initial Claim: ExxonMobil filed administrative claims for a refund of Php105,093,536.47 with the BIR.
    • CTA Petition: When the BIR didn’t act, ExxonMobil filed a petition for review with the Court of Tax Appeals (CTA).
    • CIR’s Motion: The CIR moved to resolve first whether ExxonMobil was the proper party to claim the refund.
    • CTA Ruling: The CTA ruled against ExxonMobil, stating that only the manufacturer or producer of the petroleum products could claim the refund.

    The Supreme Court upheld the CTA’s decision, emphasizing that excise taxes are indirect taxes. The court quoted:

    “[I]ndirect taxes are those that are demanded, in the first instance, from, or are paid by, one person to someone else… When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser, as part of the goods sold or services rendered.”

    The court further reasoned that:

    “Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser.”

    Therefore, because ExxonMobil was not the statutory taxpayer (Caltex and Petron were), it was not entitled to claim the refund.

    Practical Implications of the Ruling

    This case clarifies that only the entity directly liable for paying the excise tax to the government can claim a refund, even if the economic burden is shifted to another party. This has significant implications for businesses involved in the supply chain of goods subject to excise taxes. Businesses that purchase goods and then sell them to exempt entities cannot claim refunds for excise taxes already paid by the manufacturer.

    Key Lessons:

    • Statutory Taxpayer: Only the statutory taxpayer can claim excise tax refunds.
    • Indirect Taxes: The burden of indirect taxes can be shifted, but the liability remains with the original taxpayer.
    • Supply Chain Implications: Businesses in the middle of the supply chain cannot claim refunds for taxes paid by manufacturers.

    For example, if a trading company buys alcohol from a distillery and sells it to a duty-free shop, the trading company cannot claim a refund for the excise tax paid by the distillery. The distillery, as the manufacturer and statutory taxpayer, is the only party eligible to claim the refund.

    Frequently Asked Questions

    Q: What is an excise tax?

    A: An excise tax is a tax imposed on specific goods manufactured or produced in the Philippines for domestic sale or consumption, or imported goods.

    Q: Who is the statutory taxpayer for excise taxes?

    A: The statutory taxpayer is the person or entity legally obligated to pay the excise tax to the government, typically the manufacturer or producer.

    Q: Can I claim a refund for excise taxes if I purchased goods and paid a higher price due to the tax?

    A: No, only the statutory taxpayer (usually the manufacturer) can claim the refund, even if you bore the economic burden of the tax through a higher purchase price.

    Q: What is the significance of Section 135 of the NIRC?

    A: Section 135 provides exemptions from excise tax for petroleum products sold to international carriers and certain exempt entities.

    Q: What is an indirect tax?

    A: An indirect tax is a tax where the liability for payment falls on one person, but the burden can be shifted to another, such as when a manufacturer passes the tax on to the consumer through a higher price.

    Q: Does this ruling affect existing bilateral agreements with other countries?

    A: No, the court clarified that this ruling does not unilaterally amend existing bilateral agreements. The exemption from excise tax for international carriers remains in effect.

    Q: What should businesses do to ensure compliance with excise tax regulations?

    A: Businesses should carefully review their supply chain and identify the statutory taxpayer for excise taxes. They should also ensure they have proper documentation to support any claims for exemptions or refunds.

    ASG Law specializes in tax law and regulatory compliance. Contact us or email hello@asglawpartners.com to schedule a consultation.