BIR Ruling [DA-025-04]

January 16, 2004 BIR RULING [DA-025-04] Sec. 6 RA 7293 DA-272-2000 Philippine Long Distance Telephone Company 11th Floor, Ramon Cojuangco Building Makati Avenue, Makati City Attention: Atty. Kathyrn Ang-Zarate Coordinator Tax Planning Center Gentlemen : This refers to your letter dated February 7, 2001 requesting on behalf of Pilipino Telephone Corporation (Piltel), for a confirmation of your opinion that Piltel is exempt from documentary stamp tax (DST) imposed under Title VII of the National Internal Revenue Code of 1997. It is represented that Piltel was granted a legislative franchise to install, operate and maintain telephone systems on June 2, 1969 under Republic Act (RA) No. 6030, as amended by R.A. No. 6531 on May 19, 1972; that under Section 8 of said R.A. No. 6030, as amended by R.A. No. 6531, it was provided that in consideration of the franchise, Piltel "shall pay a tax equivalent to two percent of its gross income each year . . . and the said tax shall be in lieu of all other taxes, duties, assessments, stamp taxes, licenses and fees of whatever kind and nature, which may be levied by any government authority now or in the future upon the grantee's privilege, earnings, income, vehicles, machinery, equipment and other property of whatever kind and nature"; that on March 27, 1992, R.A. No. 7293 took effect, extending the term of Piltel's franchise and requiring it to pay a 3% franchise tax on all gross, receipts of the telephone or other telecommunication businesses transacted under said franchise, and the said percentage tax shall be in lieu of all taxes on this franchise or earnings thereof; and that Section 6 of R.A. No. 7293 provides as follows: " SEC. 6. Tax Provisions . The grantee shall be liable to pay the same taxes on its real estate, buildings, and personal property exclusive of this franchise as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee shall pay to the Bureau of Internal Revenue each year, within thirty (30) days after the audit and approval of the accounts, three per centum (3%) of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee shall continue to be liable for income taxes payable under Title II National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. . ." CTAIDE In reply, please be informed that the phrase "in lieu of all taxes on this franchise or earnings thereof" under Section 6 of RA 7293 declares in effect that Piltel, after paying a franchise tax equivalent to 3% of all gross receipts of the telephone or other telecommunication businesses covered by its franchise may not be required to pay the documentary stamp tax imposed under Title VII of the Tax Code of 1997, on various documents, papers and instruments executed by it which are necessary in the conduct of its business covered by the franchise. However, pursuant to Section 173 of the Tax Code of 1997, "whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax." In other words, since Piltel is enjoying tax exemption by virtue of the "in lieu of all taxes on this franchise or earnings thereof" provision of its legislative franchise, the other party to the taxable document shall be directly liable to pay the tax. (BIR Ruling Nos. DA-272-2000 dated June 28, 2000; DA-234-97 dated July 9, 1997) On the other hand, Piltel shall continue to be liable for all income taxes payable under Title II of the Tax Code of 1997, e.g. the 32% corporate income tax effective January 1, 1998, 20% final withholding tax (FWT) on interest derived from Philippine currency bank deposits and yield from deposit substitutes, trust funds and similar arrangements, and royalties derived from sources within the Philippines; 7% FWT on interest income from a depository bank under the expanded foreign currency deposit system; capital gains tax from the sale of shares of stock not traded in the stock exchange and from the sale, exchange or disposition of lands and/or buildings; minimum corporate income tax; and improperly accumulated earnings tax. It may also be stated in this connection that under Republic Act No. 7716, otherwise known as the Expanded VAT Law, as amended by R.A. No. 8241, Piltel shall no longer be subject to the 3% franchise tax on its gross receipts from business covered by the law granting the franchise, but to the 10% VAT prescribed under Section 108 of the Tax Code of 1997. (BIR Ruling No. 027-97 dated March 31, 1997) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group