BIR Ruling [DA-097-03]

March 27, 2003 BIR RULING [DA-097-03] R.A. 7916; Secs. 173 & 180; DA-111-2001 dtd 6/15/01 SGV & Co. 6760 Ayala Avenue Makati City Attention: Mr. J. A. Osana Tax Division Gentlemen : This refers to your letter dated February 3, 2003, requesting for a confirmation of your opinion that Globe Telecom, Inc. (Globe) is not liable to pay the documentary stamp tax (DST) imposed under Section 180 of the Tax Code of 1997 on foreign loan agreements it executed with its non-resident foreign creditors on the basis of the "in lieu of all other taxes" clause in its legislative franchise. The facts as represented are quoted as follows: "Globe is a domestic corporation organized and existing under Philippine laws operating as a telecommunications entity pursuant to two (2) franchises. These franchises are Batas Pambansa (BP) Bilang 95 and Republic Act (RA) No. 402, as amended. "B.P. 95, which took effect on December 24, 1980, granted a franchise to Globe-Mackay Cable and Radio Corporation (GMCR) whose corporate name was amended to Globe Telecom, Inc. in 1992. Meanwhile, R.A. 402, which took effect on June 18, 1949, as amended by R.A. 4540, effective June 19, 1965, granted a franchise to Clavecilla Radio System (CRS). "In March 1992, CRS was merged with GMCR, the latter as surviving company. The merger was approved by Congress in R.A. 7229 dated March 16, 1992. "Section 9 of B.P. 95 provides that GMCR shall pay to the Commissioner of Internal Revenue during the life of the franchise, a tax of 5% of the gross receipts derived by the Grantee from its operation under the franchise which tax shall be 'in lieu of income tax'. "On the other hand, Section 9 of R.A. 402, as amended, provides: 'Section 9 (a). The grantee shall be liable to pay the same taxes on its real estate, buildings, and personal property, exclusive of the franchise, as other persons or corporations are now or hereafter may be required by law to pay, except radio equipment, machinery and spare parts needed in connection with the business of the grantee, which shall be exempt from customs duties, tariffs and other taxes, as well as those declared exempt in this section. `(b) The grantee shall further pay to the Treasurer of the Philippines each year after the audit and approval of the accounts as prescribed in this Act, one and one-half per centum of all gross receipts from business transacted under this franchise by the said grantee in the Philippines, in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authority whatsoever, municipal; provincial or national, from which the grantee is hereby expressly exempted , effective from the date of the approval of Republic Act Number 1618. CAScIH 'Section 20. This franchise shall not be interpreted to mean an exclusive grant of the privileges herein provided for, however, in the event of any competing individual, partnership, or corporation, receiving from the Congress of the Philippines a similar permit or franchise more favorable than those herein granted or tending to place the herein grantee at any disadvantage, then such terms or terms, shall, ipso facto become part of the terms hereof, and shall operate equally in favor of the grantee as in the case of said competing individual, partnership or corporation .' (Emphasis supplied) "Note: While B.P. 95 only provides that payment of the 5% franchise tax on gross receipts shall be in lieu of income tax, R.A. 402, as amended, on the other hand, grants a broader `in lieu of all other taxes' clause. Thus, under R.A. 402, Globe is only required to pay a franchise tax of 1.5% on all gross receipts from business transacted under its franchise and such tax shall be in lieu of any and all taxes of any kind, local or national. "In November 1986, Executive Order (EO) No. 72 was issued, which rationalizes the taxes and exemptions of franchise operators, including telecommunications companies. Under this EO, telecommunications companies are subject to a 3% franchise tax upon gross receipts from the business covered by their respective franchise. In addition, the franchise grantees became subject to regular income tax imposed under the Tax Code. Accordingly, Globe's franchise has been amended by the subject EO to the extent that the subject EO has changed the franchise tax rate to 3% and imposed income tax on franchise grantees. All the other provisions of Globe's franchise remain valid. "Of course, with the passage of the EVAT Law (R.A. 7716) effective May 28, 1994, all franchise grantees except electric, gas, and water utilities, have been subject to 10% VAT in place of the franchise tax. However, the payment of 10% VAT is still in lieu of all other taxes as confirmed by the BIR in an undated BIR Ruling No. UN 198-7-6-94." In reply, please be informed that the phrase "in lieu of all taxes" under both franchise B.P. Bilang 95 and R.A. No. 402 as amended, declares in effect that Globe after paying a franchise tax 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 Globe is enjoying tax exemption by virtue of the "in lieu of all taxes" provision of its legislative franchise, the other party to the taxable document shall be directly liable to pay the tax. ( BIR Ruling No. DA-234-94 dated July 1997 and DA-272-2000 dated June 28, 2000 ). Nevertheless, the non-resident creditors on the other hand cannot likewise be made directly liable for the documentary stamp tax (DST) since it is an entity outside the reach of our taxing authority and therefore is not subject to Philippine tax laws. ( BIR Ruling No. 007-2000 dated January 5, 2000 cited in DA-111-2001 dated June 15, 2001 ) 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, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group