MANILA, Philippines - European carrier Air France-KLM has elevated its complaints against the Philippines’ "discriminatory" taxes on foreign airlines to the government level, hoping bilateral talks along with planned lobbying in Congress will resolve the matter, ranking executives said on Tuesday.
This tack is being pursued instead of an outright filing of a dispute case at the World Trade Organization which is still a "subject of discussion," said Marnix H. Fruitema, senior vice-president for Asia Pacific at KLM Royal Dutch Airlines.
In the meantime, the company may reconsider operations here as profit margins are being wiped out by the country’s common carrier tax and gross Philippine billings tax, said Cees Ursem, KLM’s general manager for the South China sea division.
"Our governments are fully aware. We have our governments talk with the Philippines," Mr. Ursem said in an interview, referring to the ongoing tax dispute.
Under the National Internal Revenue Code, international air carriers must pay a 5.5% tax on revenues broken down as a 3% common carrier tax on 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 Tourism department itself has noted that this tax policy is unique to the Philippines.
KLM is the only remaining carrier that flies direct between Manila and Europe. It celebrates its 60th anniversary in the Philippines next year.
"And a number of congressmen are aware of this. We will look for support within Congress and Senate. The government is aware we don’t have such a long time," Mr. Ursem added.
"We have the fullest confidence it (the tax issue) will come in order," Mr. Fruitema said.
Batangas Rep. Hermilando I. Mandanas (2nd district), chairman of the House of Representatives ways and means committee, could not be immediately reached for comment. But he had earlier said he would file a bill to address foreign airlines’ concern on this matter.
For now, complying with Philippine tax laws has meant the carrier has enjoyed little to no margins from its operations here, the officials claimed.
"The margin in our industry in the good years is 5%-7%. If you have to pay 5.5% tax, what you earn is gone. You might as well close shop," Mr. Fruitema said.
The picture is worse, said Mr. Ursem, as the profit margin for Philippine operations is "negative," with other regional flights subsidizing costs here.
The carrier’s revenues from the Philippines are expected to flatten this year from 2009, in contrast to the 20% growth expected from its Asia-Pacific operations, the officials said.
"We can’t say definitely [we will stay here]. We will take [the tax issue] step by step with fullest confidence it will be solved soon. If it continues like this, we will reconsider," Mr. Fruitema said.
It is keen on resolving the issue and remain in the Philippines, however, as the company enjoys a niche of having the only "nonstop product to Europe," he said.
"[Connecting flights] is not the idea for Manila. I’m not sure the customer will like it," he said.
"We play a major role in the economy... and we would love to expand that role."