BIR Ruling

February 17, 1997 Engr. James C. Jadormio Manager, Jade Cable Systems, Inc. 88 Antonio Luna Street Cagayan de Oro City S i r : This refers to your letter dated August 30, 1996 filed in behalf of JADE CABLE SYSTEMS, INC. (JADE for brevity) requesting reconsideration of our assessment in the aggregate amount of P 999,299.17 representing deficiency taxes for 1993 under Assessment Nos. RR 16-129-96 and 098-14-93-00147, graphically presented as follows: Def. Value Added Tax P 979,631.43 Def. Expanded Withholding Tax 5,386.49 Def. Documentary Stamp Tax 13,281.25 TOTAL P 999,299.17 Records show that for the taxable year 1993, the Company was assessed deficiency franchise tax of P462,757.89, documentary stamp tax of P13,281.25 and expanded withholding tax of P5,386.49, covered by Assessment Notice No. 098-14-93-000147 dated December 28, 1995. In a letter dated March 29, 1996, JADE objected to the assessment of the franchise tax on the ground that as of 1993 or when JADE was just starting operation, the law regulating cable TV enterprise (the line of business JADE is engaged in) had yet to be passed by Congress. Accordingly, with respect to the contested deficiency franchise tax, an amended assessment (Assessment Notice No. RR 16-129-96) was issued on the account of a reinvestigation conducted. It was found out that JADE is not a national franchise grantee. Thus, the 5% franchise tax was revised and instead the Bureau levied the 10% value added tax pursuant to Section 102(a) of the Tax Code, as amended. The latest assessment yielded a higher tax rate, inclusive of increments, of P979,631.43. You requested reconsideration thereof considering that its imposition would result to the financial ruin of JADE which is still in its infant stage. You requested that in case the aforesaid assessment is valid, to credit JADE's input tax against its output tax despite the fact that in 1993 JADE is not yet VAT registered. In reply, please be informed that after a careful review of the facts of the case and the laws and jurisprudence applicable thereto, we find your request to be without merit. cdt Since it was ascertained that JADE is not a national franchise grantee, inasmuch as the law regulating cable operation has yet to be passed, the BIR desisted from collecting the 5% franchise tax. However, this does not mean that JADE is exempt from taxes on its gross income. JADE's tax obligation is covered by Section 102 of the Tax Code, as amended, quoted in part as follows: "Section 102. Value-added tax on the sale of services . (a) Rate and base of tax . There shall be levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived by any person engaged in the sale of services. The phrase "sale of services" means the performance of all kinds of services for others for a fee, remuneration or consideration . . ." On the other hand, Section 107 of the Tax Code states that persons subject to value-added tax shall register with the appropriate revenue district officer. Compliance with the registration requirement is important especially in claiming a tax credit. Section 104 provides that: "Section 104. Tax Credits . (a) Creditable input tax Any input tax on the xxx xxx xxx (2) Service performed by a VAT registered person shall be credited against the output tax payable by the VAT registered person : xxx xxx xxx "Input tax" means the value-added tax paid by a VAT registered person in the course of his trade or business on importation of goods or local purchases of goods or services from a VAT registered person." xxx xxx xxx "The term "output tax" means the value-added tax due on the sale of taxable goods or services by any person registered or required to register under Section 107 of this Code" [Emphasis supplied] The law is explicit that before a VAT taxpayer may credit his input tax from his output tax it is mandatory that the taxpayer is first a VAT-registered person. Consequently, JADE's failure to register in 1993 pursuant to Section 107 of the Tax Code disqualifies it from claiming tax credits for the input taxes incurred in the same taxable year. In tax administration, the fact that a tax imposition will result in a taxpayer's financial ruin will not justify the cancellation or abatement of the tax liability. In this jurisdiction, we recognize the awesome power of taxation. A U.S. Chief Justice once said that "the power to tax involves the power to destroy." This, however, pertains only to the extent the taxing power may be employed in order to raise revenue, the only limitation being that, it must be exercised fairly, equally and uniformly as enshrined in the Constitution. In view of the foregoing, your request for reconsideration has to be as it is hereby DENIED. You are requested to pay the amount of P999,299.17 representing deficiency value added, expanded withholding and documentary stamp taxes for 1993, plus interest that may have accrued thereon, to the Revenue District Office nearest your place of business within ten (10) days from receipt thereof, in order that this case may be closed and terminated. LexLib This constitutes the final decision of this Office on the matter. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue