THE Department of Finance is unlikely to grant the request of Air France-KLM and some business groups for the abolition of the common-carriers tax on cargoes and passengers of foreign airlines because of the revenue losses that such a move will create.

In a position paper, Finance Secretary Cesar Purisima said the government stands to lose about P2.5 billion in revenues from these taxes that many airlines and other carriers want abolished.

The government is slapping the international air carriers a 2.5-percent gross Philippine billing tax and the 3-percent common-carriers tax on cargo and passenger revenues originating from the country.

“We have reservations on any measure that would involve forgoing the collection of the gross Philippine billing tax and common-carriers tax as it would inflict huge fiscal costs on the government,” the position paper stated. “Upfront government revenue loss is on the average P1.6 billion [common-carriers tax] plus P900 million [gross Philippine billing tax], or a total of P2.5 billion, based on 2004-09 collections.”

The Joint Foreign Chambers, in asking the government to abolish these taxes, said they make the country uncompetitive with its Asian peers. The JFC wants the tax regime on foreign air and shipping companies changed from the current percentage tax to value-added tax (VAT) zero-rated. The chamber said this would “provide immediate relief to the international carriers as well as help double the volume of international arrivals and benefit tourism, trade, the goal of job generation, and ultimately government revenues, as well.”

Air France-KLM, the remaining international carrier with direct flights from Manila to Amsterdam, has announced its plan to stop direct flights to the Philippines because of the controversial taxes. KLM said it will immediately slash its flights to six times a week from daily, but starting April 2012, it will stop direct flights to Manila and fly via Hong Kong instead.

Purisima said changing the tax type on foreign carriers from the current percentage tax to VAT zero-rated is not allowed by law.

“We have been communicating to the industry that any change in the law requires legislative action. It cannot be done by an Executive action,” he said.

“Applying this essential principle, an international common carrier, which is subject to a percentage tax by specific provision of the law, cannot be registered as a VAT taxpayer. There is no law exempting from percentage taxes those transactions or taxpayers which are covered by VAT so that even if the government allows an international common carrier to register as a VAT taxpayer, such will not exempt it from the common-carriers tax,” Purisima said.

House Bill 4444 is seeking the exemption of international air carriers from the payment of the gross Philippine billing tax and the common-carriers tax, but Purisima said it introduces inequity issues since it will only exempt foreign air carriers and not foreign shipping from the taxes.

“Any move that will exempt international air carriers from paying both the gross Philippine billing tax and the common-carriers tax or change tax type from the present percentage tax would unduly penalize domestic carriers that are still liable to pay both the corporate-income tax and the VAT,” Purisima said.