April 11, 1994

BIR RULING NO. 089-94

25 (b) (4) 50 (a) 000-00 089-94

Silangan Airways, Inc.

Facilities Center, 548 Shaw Blvd.
Mandaluyong, Metro Manila
Attention: Mr. Vicente Alejandro Araneta
Chairman and Chief Executive Officer

Gentlemen :

This refers to your letter dated March 28, 1994 requesting for a ruling on the
taxability of your importation of one (1) Yokovlev 42D Trijet Aircraft under a lease
agreement between your company and Aviaexport of Moscow. cdta

It appears that Silangan Airways, Inc. is a grantee of a legislative franchise

under Republic Act No. 7349 approved on April 2, 1992, to establish, operate and
maintain transport services for carriage of passenger, mails, goods and property by air,
both domestic and international; that pursuant to a Lease Contract No. 76-024/05001
dated January 25, 1994, entered into by and between V/O Aviaexport Public Limited
Company, Moscow, the Russian Federation as lessor and Silangan Airways, Inc.,
Manila, Philippines as lessee, the lessee has agreed to pay and take on lease from the
lessor YAK-42 aircraft with D-36 engine installed on the leased aircraft and
equipment for carrying and transportation of passengers; that the Lessor shall provide
the Leased Aircraft with such personnel (flight crew and field staff) which may be
required for its servicing, operation and maintenance; that the Leased Period
commences from the date of beginning the flight of the Leased Aircraft from the basic
airport of the Lessor, the Russian Federation to the Philippines and shall subsist for a
period of six months from the said date; that the contract shall be terminated after
expiration of the said Leased Period and the aircraft shall be returned back to the
Russian Federation; that the parties to the contract can prolong the lease period

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 stipulated only upon signing of an additional mutual agreement by their authorized
representatives; that the price of leasing under the lease contract is U.S. $120,000
(One hundred twenty thousand U.S. Dollars) — per month; that payment under the
present contract is to be effected in U.S. Dollars fifteen (15) days prior to the delivery
of Leased Aircraft; and that the lessee will pay to the lessor the amount of U.S.
$360,000.00 (Three hundred sixty thousand U.S. Dollars only) in cash or in acceptable
guarantee.

In reply, please be informed that under the pertinent provisions of Sections 11

and 12 of R.A. 7349 in relation to Section 13 of P.D. 1590 (franchise of Philippine
Airlines) which state as follows:

"Sec. 11. Tax Provisions. — The grantee shall pay to the Philippine
Government during the life of this franchise, a franchise tax of five percent (5%)
of the gross revenues derived by the grantee from transport operations.

"In the event any competing individual, partnership and corporation

receives and enjoys tax privileges which tend to place the grantee herein at any
disadvantage, then such provisions shall be deemed part hereof and shall
operate equally in favor of the grantee. (emphasis supplied)

xxx xxx xxx

"Sec. 12. Interpretation of Franchise. — This franchise shall not be

interpreted to mean as an exclusive grant of the privileges herein provided for.
However, in the event that any competing individual, partnership, or
corporation shall receive a similar permit or franchise with terms and/or
provisions more favorable than those herein granted or which tend to place the
herein grantee at any disadvantage, then such term and/or provision shall be
deemed part hereof and shall operate equally in favor of the grantee herein.

"Sec. 13. (PAL's franchise) In consideration of the franchise and

rights hereby granted, the grantee shall pay to the Philippine Government during
the life of this franchise whichever of subsections (a) and (b) hereunder will
result in a lower tax.

"(a) . . .

"(b) A franchise tax of two per cent (2%) of the gross

revenues derived by the grantee from all sources, without
distinction as to transport or nontransport operations; provided,
that with respect to international air-transport service, only the

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 gross passenger, mail, and freight revenues from its outgoing
flights shall be subject to this tax.

"The tax paid by the grantee under either of the above alternatives shall
be in lieu of all other taxes, duties, royalties, registration, license, and other
fees and charges of any kind, nature, or description, imposed, levied,
established, assessed, or collected by any municipal, city, provincial, or
national authority or government agency, now or in the future . . .".

the tax exemption privileges granted to Philippine Airlines shall automatically become
part of the franchise of Silangan Airways, Inc. and shall operate equally in its favor.

Such being the case, your lease of the subject aircraft under the lease
agreement shall not be subject to the value-added tax imposed under Section 101(a) of
the Tax Code, as amended.

However, the rentals to be paid to Aviaexport of Moscow shall be subject to

the final withholding tax at-source of 7 1/2% pursuant to Section 25(b)(4) in relation
to Section 50(a) both of the Tax Code, as amended. cdtech

Very truly yours,

LIWAYWAY VINZONS-CHATO
Commissioner of Internal Revenue

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