The Supreme Court ruled that Philippine Airlines (PAL) is entitled to a refund of excise taxes on imported aviation fuel. Even though PAL isn’t the direct taxpayer, its franchise agreement grants it tax exemptions on both direct and indirect taxes. This decision clarifies that tax exemptions can extend beyond the statutory taxpayer to entities bearing the economic burden, provided the law explicitly allows it. This ruling has significant implications for companies with similar franchise agreements, allowing them to claim tax refunds even when indirect taxes are passed on to them.

Franchise Perks or Tax Burden? PAL’s Fight for Excise Tax Refunds

This case revolves around Philippine Airlines’ (PAL) claim for a refund of excise taxes it paid on imported aviation fuel purchased from Caltex Philippines, Inc. PAL argued that its legislative franchise, Presidential Decree No. 1590, granted it certain tax exemption privileges, covering both direct and indirect taxes. The Commissioner of Internal Revenue (CIR) countered that only the statutory taxpayer, Caltex, could claim the refund, citing the Silkair ruling. The central legal question is whether PAL, despite not being the direct taxpayer, has the right to claim a refund of excise taxes passed on to it due to its franchise agreement.

The Court began its analysis by differentiating between direct and indirect taxes. Direct taxes are those directly levied on individuals or entities, while indirect taxes are initially paid by one party (the statutory taxpayer) but intended to be passed on to another. Excise taxes, as outlined in Section 129 of the National Internal Revenue Code (NIRC), fall under the category of indirect taxes. Therefore, the manufacturer or producer (for domestic goods) or the owner or importer (for imported goods) is responsible for paying the excise tax. However, they can shift the economic burden to the purchaser, typically by including it in the product’s price.

The CIR relied heavily on the Silkair case, which stated that only the statutory taxpayer can seek a refund of indirect taxes. This principle generally holds true because, in the context of indirect taxes, the purchaser merely pays the seller a higher price to cover the tax obligation to the government. However, the Supreme Court distinguished the present case from Silkair, emphasizing that PAL’s franchise agreement contains specific provisions granting it exemptions from both direct and indirect taxes.

The Court then referred to the Maceda v. Macaraig, Jr. case, where the National Power Corporation (NPC) was allowed a tax refund because its charter explicitly exempted it from both direct and indirect taxes. This precedent supports the idea that when a statute clearly grants an exemption from both types of taxes to a party bearing the economic burden, that party can claim a tax refund, even if they are not the statutory taxpayer. The critical factor is the scope of the tax exemption provided by law.

Section 13 of PAL’s franchise is crucial to this determination. It states that PAL’s payment of either the basic corporate income tax or franchise tax (whichever is lower) is “in lieu of all other taxes.” This includes, but is not limited to, taxes directly due from or imposed upon the purchaser or the seller, producer, manufacturer, or importer, when such taxes are passed on to PAL. In essence, PAL’s franchise exempts it from paying both direct taxes and the cost of indirect taxes passed on to it by sellers or importers.

SEC. 13. In consideration of the franchise and rights hereby granted, the grantee [PAL] 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) The basic corporate income tax based on the grantee’s annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code; or

(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 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, including but not limited to the following:

1. All taxes, duties, charges, royalties, or fees due on local purchases by the grantee of aviation gas, fuel, and oil, whether refined or in crude form, and whether such taxes, duties, charges, royalties, or fees are directly due from or imposable upon the purchaser or the seller, producer, manufacturer, or importer of said petroleum products but are billed or passed on the grantee either as part of the price or cost thereof or by mutual agreement or other arrangement; provided, that all such purchases by, sales or deliveries of aviation gas, fuel, and oil to the grantee shall be for exclusive use in its transport and nontransport operations and other activities incidental thereto;

The CIR also argued that Letter of Instruction No. 1483 (LOI 1483) withdrew PAL’s tax exemption privilege on its purchase of domestic petroleum products for use in its domestic operations. The Court disagreed, clarifying that LOI 1483 only applied to PAL’s tax exemptions on excise tax costs from sellers or manufacturers of locally produced goods. It does not pertain to PAL’s tax privileges regarding imported goods, whether the excise taxes are passed on to PAL by the importer or PAL directly imports the goods. The word “domestic” in LOI 1483 refers to goods manufactured or produced in the Philippines, not imported items.

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution, do hereby order and direct that the tax-exemption privilege granted to PAL on its purchase of domestic petroleum products for use in its domestic operations is hereby withdrawn.

Furthermore, the Supreme Court analyzed the “whereas clauses” in LOI 1483, which revealed that the law aimed to remove the tax privilege discussed in a Department of Finance (DOF) Ruling dated November 17, 1969. This ruling clarified that PAL’s franchise included tax exemptions on aviation gas, fuel, and oil manufactured or produced in the Philippines for domestic sales. Thus, LOI 1483 targeted tax exemptions on locally produced goods, leaving PAL’s tax privileges related to imported goods untouched. The fuel Caltex sold to PAL was imported; therefore, it was beyond the scope of LOI 1483.

Finally, the Court determined that PAL had sufficiently proven its entitlement to the tax refund. The claim was filed within the two-year prescriptive period under Section 229 of the NIRC. PAL had paid the lower of the basic corporate income tax or franchise tax, as required by its franchise. And the excise taxes in question were duly declared and remitted to the BIR. Despite some discrepancies noted by the CTA, the Court found adequate explanations and consistent documentation to support PAL’s claim. The excise tax returns filed by Caltex declared a different amount (P2,975,892.90) compared to the amount sought to be refunded (P2,952.037.90), resulting in a discrepancy of P23,855.00. However, the Supreme Court found a sufficient explanation for the difference.

Based on the records, Caltex sold a total of 810,870 liters of aviation fuel, with 804,370 liters sold to PAL and the remaining 6,500 liters sold to another client, LBOrendain. The excise tax rate was P3.67 per liter. Multiplying this rate by the 6,500 liters sold to LBOrendain accounts for the P23,855.00 difference. This detailed reconciliation of the amounts further supported PAL’s claim for a refund.

What was the key issue in this case?	The central issue was whether Philippine Airlines (PAL) could claim a refund of excise taxes on imported aviation fuel, even though the taxes were initially paid by Caltex, the importer. PAL argued that its franchise agreement granted it tax exemptions.
What is an excise tax?	An excise tax is an indirect tax imposed on specific goods, like petroleum products. It’s initially paid by the manufacturer or importer, who then usually passes the cost to the consumer.
What did the Supreme Court rule?	The Supreme Court ruled in favor of PAL, stating that its franchise agreement provided an exemption from both direct and indirect taxes, allowing it to claim the refund.
What is Letter of Instruction No. 1483 (LOI 1483)?	LOI 1483 is a directive that withdrew tax exemption privileges on the purchase of domestic petroleum products for domestic use granted to PAL. The Supreme Court, however, clarified its limited scope.
Did LOI 1483 affect PAL’s tax exemption in this case?	No, the Court clarified that LOI 1483 only pertained to locally manufactured petroleum products. Since the fuel in this case was imported, the exemption remained valid.
What is the significance of PAL’s franchise agreement?	PAL’s franchise agreement contained a clause stating that its payment of either corporate income tax or franchise tax was “in lieu of all other taxes,” which the Court interpreted as encompassing both direct and indirect tax exemptions.
Why was the Silkair case important to the CIR’s argument?	The CIR relied on the Silkair case, which held that only the statutory taxpayer can claim a refund of indirect taxes. However, the Supreme Court distinguished Silkair, because the facts are different.
How does this ruling affect other companies with similar franchise agreements?	This ruling clarifies that companies with franchise agreements providing broad tax exemptions may be able to claim refunds for indirect taxes passed on to them, even if they are not the statutory taxpayers.

This case serves as a crucial clarification on the scope of tax exemptions granted through franchise agreements. It underscores that exemptions from both direct and indirect taxes can extend to entities bearing the economic burden, provided such exemptions are clearly outlined in the law. For businesses operating under similar franchise terms, this ruling offers a pathway to reclaim taxes unduly paid, enhancing their financial position and promoting fair application of tax laws.

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: Philippine Airlines, Inc. vs. Commissioner of Internal Revenue, G.R. No. 198759, July 01, 2013