Dept of Justice Opinion: Exemption from payment of chattel mortgage registration

OPINION NO. 55, S. 2005

December 13, 2005

Administrator Benedicto B. Ulep
Land Registration Authority
East Avenue corner NIA Road
Quezon City

Administrator Ulep:

This has reference to your request for confirmation of your view that the grant of privileges and other favorable terms to the Philippine Airlines (PAL) shall also ipso facto operate equally in favor of Cebu Pacific only upon showing by the latter of a clear proof that PAL’s enjoyment of the privileges and favorable terms accorded to it will place Cebu Pacific at a disadvantage.

The instant request stemmed from the letter of Atty. Perry L. Pe, Corporate Secretary of Cebu Air, Inc. ("Cebu Pacific"), requesting confirmation that the chattel mortgage to be constituted over four (4) Airbus A319-100 aircraft to be acquired by Cebu Air, Inc. (Cebu Pacific) is exempt from registration fees imposed under Presidential Decree (P.D.) No. 1529, otherwise known as the Property Registration Decree, and the Revised Administrative Code.

It appears that Cebu Pacific, a corporation organized and existing under the laws of the Philippines, and a holder of a legislative franchise granted under Republic Act (R.A.) No. 7151 (An Act Granting Cebu Air, Inc., a Franchise to Establish, Operate and Maintain Transport Services for the Carriage of Passengers, Mail, Goods and Property by Air, Both Domestic and International, With Cebu as Its Base), executed an Aircraft Purchase Agreement with Airbus S.A.S. over twelve (12) A319-100 aircrafts for use in domestic and international operations as part of its long-term refleeting and modernization programs; that various French, German and British financial institutions will provide the financing for the transaction with corresponding guaranty or insurance by COFACE, Euler Hermes and Export Credits Guarantee Department (ECDG); that in compliance with one of the lenders’ conditions for the extension of the loan package, Cebu Pacific assigned the Aircraft Purchase Agreement to a Special Purpose Corporation (SPC) domiciled outside of the Philippines; that the SPC shall hold title to the aircraft and shall act as the borrower under relevant loan agreements and that Cebu Pacific shall then enter into a financial lease agreement with the SPC.

It likewise appears that Cebu Pacific, being the ultimate borrower, shall actually bear all the costs relating to the registration and payment of any applicable taxes of the chattel mortgage and other security documents to be constituted over the subject aircrafts. Cebu Pacific is, therefore, requesting confirmation of its exemption from payment of chattel mortgage registration fees over the four (4) Airbus A319-100.

You state that the exemption from payment of registration fees and other privileges granted to PAL continues to be in full force and effect, and subsists notwith-standing the privatization of the Philippines Airlines, in the absence of a law amending or withdrawing the privileges contained in PAL’s charter, P.D. No. 1590. It is your view, however, that before it can avail of the same privileges enjoyed by PAL, Cebu Pacific has to establish that the exemptions granted to, and enjoyed, by PAL will tend to place Cebu Pacific at any disadvantage.

Presidential Decree No. 1590 (An Act Granting a New Fran-chise to Philippine Airlines, Inc. to Establish, to Operate, and Maintain Air-Transport Services in the Philippines and Other Countries) which continues to extend certain privileges to Pal in the absence of any law amending or withdrawing the privileges in its charter, reads in part:

Sec. 13. 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) The basic corporate income tax based on the grantee’s annual net taxable income com-puted 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 distinc-tion as to transport or non-transport operations; provided, that with respect to international air-transport service, only the gross pas-senger, mail, and freight revenues from its outgoing flights shall be subject to this tax.

(1) 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 descrip-tion, imposed, levied, established, assessed, or national authority or government agency, now or in the future, including but not limited to the following:

xxx xxx xxx
(4) All taxes on interest, fees, and other charges on foreign loans obtained and other obligations incurred by the grantee where the payment of such taxes is assumed by the grantee;

(5) All taxes, fees, and other charges on the regis-tration, licensing, acquisition, and transfer of aircraft, equipment, motor vehicles, and all other personal and real property of the grantee; and
xxx xxx xxx
(emphasis supplied)

On the other hand, the legislative franchise granted in favor of Cebu Air, Inc., specifically Section 11 of R.A. No. 7151 provides:

SEC. 11. Tax Provisions. -
xxx xxx xxx
In the event that any competing individual, part-nership or corporation re-ceives and enjoys tax privi-leges and other favorable terms which tend to place the herein grantee at any disad-vantage, then such provisions shall be deemed ipso facto part hereof and shall operate equally in favor of the grantee.
xxx xxx xxx
(emphasis supplied)

Based on the foregoing premises, this Department confirms that the "most favored treatment" clause found in Section 11 of R.A. No. 7151 expressly provides that tax privileges or favorable term/s received or enjoyed by any competing individual, partnership or corporation - in this case, PAL, shall automatically be deemed incorporated in the franchise of Cebu Pacific. The basic idea of the aforesaid clause is "fair play", such that a rival firm will not gain an undue or unfair advantage over the other in the pursuit of their respective competing business. In other words, the purpose of the said clause is to place the holder thereof on an equal footing with its rival enterprise by not giving such competitors undue advantage (Secretary of Justice Opinion No. 51, s. 1987).

Please be guided accordingly.

Very truly yours,

(Sgd.) RAUL M. GONZALEZ
Secretary