BIR Ruling

July 26, 1972 MEMORANDUM FOR: The Chief, Income Tax Division There is returned to you herewith the Audit report of the General Auditing Office dated March 6, 1972, bearing on the franchise tax liability of the Eastern Extension Australasia and China Telegraph Company Ltd., with Office at Mercury House, 430 T. M. Kalaw St., Ermita, Manila, covering the period from January 1 to December 31, 1970 with the following information: The only issue for resolution is whether or not the Company is liable to income and other taxes as regards its miscellaneous income in the amount of P360,000.00 and whether such income is subject to franchise tax. It appears that the aforesaid amount was realized by the Company as a project fee in managing the construction of the Communication networks of Oceanic Wireless Network Inc. at Tanay, Dau, Baguio and Vigan which when based under Section 8 of Republic Act No. 808, a portion of which is quoted as follows: "Section 8. In consideration of the franchise and rights hereby granted, the Grantee shall pay to the Republic of the Philippines during the life of this franchise a tax of five per cent of the gross earnings derived by the Grantee from its operation under this franchise and which originate in the Philippines. . ." does not constitute part of the gross earnings derived by the Company from the operation of its franchise. Foregoing considered, and in line with the decision of the Court of Tax Appeals in the case entitled "Meralco vs. Commissioner of Internal Revenue" (CTA No. 1737) promulgated on November 22, 1969, to the effect that all earnings of franchise holders derived from sources not specified by their respective franchises are liable to pay income tax on such earnings, and therefore should be excluded for purposes of the franchise tax which are based on gross income covered by their franchise, the amount of P360,000.00 as project fee in this case should be deducted from the total gross receipts for purposes of the computation of the franchise tax. In this connection your attention is invited to Revenue Memorandum Order No. 15-72 dated May 17, 1972. Please be guided accordingly. PRISCILLA R. GONZALES Revenue Operations Head (Legal)