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July 21, 2011

HIS EXCELLENCY BENIGNO C. AQUINO III President Republic of the Philippines Malacanang, Manila

Re: Appeal for Reform of the Tax Regime for International (Foreign) Air and Shipping Carriers Dear Mr. President, The Joint Foreign Chambers (JFC) and many business organizations (both local and foreign) agree that the Philippine economy could expand faster, attract more foreign investment and two-way trade and employ more people, if the cost of doing business with and in the country can be lowered. There is no question that the Philippines must become more competitive in comparison with neighbors in ASEAN and Asia, and with economies in Latin America, the Middle East and Africa.

While the business environment and the cost of doing business here have been extensively addressed in Arangkada– The Philippine Business Perspective, we wish to focus on two specific issues today: Common Carriers Tax (CCT), and Gross Philippine Billings (GPB), which are imposed on international carriers, both air and sea, and create an onerous financial burden on their continued operations, making it more expensive – and therefore less attractive – to call on the Philippines, depriving the import / export industry in the Philippines of more competitive freight costs and depriving the Philippine tourism industry of the tourist potential.

The payments levied on the international carriers are significant: AIR – Pesos 3.2 billion – CCT and GPB in 2010 SEA – Pesos 1.3 billion in CCT alone Background on these taxes Under Section 118 of the National Internal Revenue Code of 1997, as amended, international (foreign) shipping and air carriers doing business in the Philippines shall pay a tax equivalent to 3% of their gross revenues. The CCT, classified as a percentage tax, is on top of the income tax of 2.5% (or 1.5% under applicable tax treaties) on its gross Philippine billings.

These two taxes are levied as a percentage of flown revenues from ticket, cargo and excess baggage carried ex- Philippines up to the final destination regardless of the country of sale and/or issuance.

Thus, in the case of foreign air carriers, the revenue associated with a ticket sold in Europe, returning to Europe would be included in the basis for taxation.

Discriminatory taxes Foreign air and shipping carriers are subject to the 3% CCT while their Philippine counterparts enjoy VAT zero-rating for international operations. They also pay taxes on their GPB, considered as an income tax, regardless of whether their Philippine operations are profitable or not. The GPB tax has nothing in common with income tax as internationally practiced since it is a fixed percentage that foreign air carriers have to pay irrespective of the financial results of their Philippine operations. Philippine air carriers for example are not subject to the same practice in international routes where they operate and compete with foreign air carriers.

The discriminatory treatment accorded to by existing legislation in favor of domestic carriers and to the prejudice of foreign carriers is untenable and seriously imperils the country’s commitments and obligations under international agreements (WTO and GATS).

Specifically in the case of the foreign air carriers, the discrimination contravenes the principles of the International Civil Aviation Organization of which the Philippines is a signatory.

Impact on Philippine Competitiveness AIR -Part of the reason why the number of airlines operating in the Philippines has declined over the years can be attributed to this unfriendly and grossly onerous tax regime for international airlines in the Philippines. These taxes and their pertinent regulations are not consistent with international standards and practices, thus making the Philippines the most expensive investment destination for airlines in ASEAN. They also make the President’s ‘Open Skies Policy’ less attractive.

SEA – The CCT is a major obstacle to competitive liner shipping operations in the Philippines.

Why would it make good economic sense to eliminate those taxes?

SEA – With the removal of the tax onus on foreign carriers, the competitiveness of Philippine ports will be breaking new ground. A more open, liberalized landscape that will help promote investments is thus formed as the cost of doing business in the Philippines is reduced. This will entice foreign carriers to increase their calls in the country which will translate to lower transport costs.

AIR – The IATA conducted an economic analysis of the effect of eliminating these taxes in the Philippines:  Lower total cost of international passenger travel in the Philippine market by 2.5%;  Increase in the number of international arrivals and departures in the Philippines by 230,000 passengers, representing a growth of 1.9%;  Increase in the number of international visitors by 70,000 and potential gains of between Pesos 1.7 – 3.5 billion for the wider Philippine economy from increased tourism activity. The increase in tourism arrivals will in turn create an additional 70,000 jobs, Pesos 9.6 billion in employee compensation and Pesos 243 million in tourism tax revenues;  Lower cargo transport costs could give a boost to export earnings in the order of Pesos 45 billion.

What can be done?

In order to create a level playing field, Mr. President, and allow the Philippines to gain its rightful place in trade, investments and tourism, here are the options that can be taken: 1. Direct the Secretary of the Department of Finance (DOF) and the Commissioner of the Bureau of Internal Revenue (BIR) to allow foreign carriers to change tax type from percentage to VAT zerorated. This administrative measure will remove the burden from the CCT and provide immediate relief to the international carriers. This will help double the volume of international arrivals and benefit tourism, trade, the goal of job creation, and ultimately government revenues.

2. Declare House Bill No. 4444 (attached), introduced by Hon. Jerry P. Trenas and supported by the undersigned, as urgent. The bill seeks to advance Philippine tourism, trade, employment and economic integration with the rest of the world eliminating the negative impact of CCT and GPBT on Philippines’ international connectivity and competitiveness as an international investment destination.

We thank you, Mr. President, for your support.

CC: Executive Secretary Paquito Ochoa Secretary Cesar Purisima, DOF Secretary Mar Roxas, DOTC Customs Commissioner Alvarez BIR Commissioner Henares

European Chamber of Commerce of the Philippines (ECCP)

Hubert d’Aboville President British Chamber of Commerce

German-Philippine Chamber of Commerce

Keith Perrin Chairman

Reiner Allgeier President

French Chamber of Commerce

Spanish Chamber of Commerce

Ernst Wanten President

Miguel Romero-Salas President

American Chamber of Commerce of the Philippines

Austen Chamberlain President Australian-New Zealand Chamber of Commerce

John Casey President Canadian Chamber of Commerce

Julian Payne President

Japanese Chamber of Commerce

Nobuya Ichiki President

Korean Chamber of Commerce

Edward Chang President

Swiss International Airlines

KLM Air France

Paul Schenk Country Manager

Cees Ursem General Manager (South China Sea)

Hapag-Lloyd

Klaus Schroeder CEO