KLM reconsidering RP operations due to tax row

by Jessica Anne D. Hermosa, BusinessWorld

Posted at Oct 18 2010 09:33 AM | Updated as of Oct 18 2010 08:36 PM

MANILA, Philippines - KLM Royal Dutch Airlines, the sole carrier that operates long haul flights between Manila and Europe, said it may halt its Philippine operations due to local tax policies.

This comes as the government has continued to slap taxes on outbound passenger and cargo revenues of several foreign airlines whether or not the tickets were sold in the country, the KLM’s regional manager Cees Ursem told BusinessWorld last week.

If so tourism will suffer, as will trade and investment prospects, as travellers to and from Europe will have no choice but to resort to costlier and inconvenient connecting flights, an official of the European business chamber said.

"We are reconsidering our operations to Manila," Mr. Ursem said in a chance interview.

"Tax issues are hurting the airlines dramatically," he added, citing the common carrier tax and gross Philippine billings.

Under the National Internal Revenue Code, international air carriers must pay a common carrier tax of 3% of their gross receipts and a 2.5% tax on all cargo and passenger revenues "originating from the Philippines in an uninterrupted flight irrespective of the place of sale or issue ... of the ticket".

The Philippines is the only country that charges airlines these taxes, Tourism Secretary Alberto A. Lim said at last week’s Philippine Business Conference where he tagged the policy a bottleneck to development.

Lifting the taxes could increase international tourist arrivals by 2.2% and generate economic benefits worth $38-78 million, the International Air Transport Association said in a March report.

KLM has been urging officials to nix the tax. In the meantime it has reduced the seating capacity of its Philippine flights since January, Mr. Ursem said.

German airline Deutsche Lufthansa AG stopped offering its Manila-Frankfurt connection in April 2008 because of lower commercial yields and has reallocated capacity to other Asian gateways.

"We are trying to be in touch with the government. It’s positive," Mr. Ursem said.

The European Chamber of Commerce of the Philippines (ECCP) was more downbeat, claiming that even the new administration has been slow to address the matter.

"[Former] Finance Secretary Margarito B. Teves said we were barking up the wrong tree and that we had to go through legislation instead. We have the same problem with this administration," ECCP Executive Vice-President Henry J. Schumacher said in a telephone interview last Friday.

"Legislation would be a long route and there has been no indication that [the government] will make [this issue] a priority," Mr. Schumacher said.

Bureau of Internal Revenue Commissioner Kim S. Jacinto-Henares declined to comment, saying in a text message the issue "needs to be studied."

Rep. Hermilando I. Mandanas (Batangas, 2nd district), chairman of the House of Representatives ways and means committee, said he would be filing a bill to exempt foreign airlines from such taxes.

But with Congress currently on a break and expected to focus on approving the 2011 budget when they next meet, progress will likely be slow, he admitted.

In the meantime, said Mr. Schumacher, there is "frustration all over."


Tourism will only flourish if people can fly here. [Losing KLM] would be big blow as it’s the only airline that flies nonstop to Amsterdam," he said.