BIR Ruling [DA-144-98]

April 17, 1998 BIR RULING [DA-144-98] Belo Gozon Elma Parel Asuncion & Lucila 15th Floor, Sagittarius Condominium H.V. dela Costa Street, Salcedo Village Makati City 1227 Attention: Attys . Roberto Rafael V . Lucila and Ma . C . Eleanor M . Montenegro Gentlemen : This refers to your letter dated January 13, 1998 requesting, on behalf of your client, EXPRESS TELECOMMUNICATION CO., INC . ("EXTELCOM"), for a ruling that Extelcom is exempt from the payment of documentary stamp tax on various documents executed by it which are necessary in the conduct of the business covered by its franchise, such as but not limited to issuance of stock certificates, lease, loans, mortgages and pledge of shares. It is represented that Extelcom (formerly, Felix Alberto and Company, Inc.) is the grantee of a legislative franchise under Republic Act No. 2090 which extends to the company the right and privilege of: "Constructing, installing, establishing and operating in the Philippines, . . . radio stations for the reception and transmission of messages on radio stations in the foreign land the domestic public fixed point-to-point and public base, aeronautical and land mobile stations, including coastal service with the corresponding relay stations for reception and transmission of wireless messages on and/or radiotelephony, radioteletype, radiophoto, facsimile, music, pictures, advertisement and such other types of emission from or to foreign countries within the Philippines and with vessels at sea and aircrafts over the air, irrespective of whether such vessels and aircrafts are within or without the Philippines." that the tax provision of Extelcom's franchise [Sec. 14 (a) and (b)] of RA No. 2090, reads: "SEC. 14 (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. (b) The grantee shall further pay to the Treasurer of the Philippines each year, within ten days after the audit and approval of the accounts as prescribed in this Act one and one-half per centum of all gross receipts from the business transacted under this Franchise by the said grantee." that under Sec. 13 of the franchise granted to EXTELCOM, more favorable terms granted to a competitor, which holds a similar franchise as Extelcom, become ipso facto a part of the terms of Extelcom's franchise and operate equally in favor of Extelcom. Sec. 13 of Extelcom's franchise reads: "SEC. 13. In the event of any competing individual, partnership or corporation receiving from the Congress a similar franchise in which there shall be any term or terms more favorable than those herein granted or tending to place the herein grantee at any disadvantage, then such term or terms shall ipso facto become a 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) that in addition, Sec. 23 of Republic Act No. 7925, otherwise known as the "Public Telecommunications Policy Act of the Philippines," also mandates equality of treatment in the telecommunications industry, viz: "SEC. 23. Equality of Treatment in the Telecommunications Industry . Any advantage, favor, privilege, exemption or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of service authorized by the franchise." that by virtue of the aforequoted provisions of Extelcom's franchise and the Public Telecommunications Policy Act of the Philippines, the more favorable tax provision uniformly found in the franchises of Smart Information Technologies, Inc. ("SMART") [RA 7292]; Pilipino Telephone Corporation ("PILTEL") [RA 6030, as amended and ISLA Communications, Co. (ISLACOM) RA 7372], which are competitors of Extelcom in the business covered by its franchise, quoted in full below, operates equally in favor of Extelcom. "The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent of three percent (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof. Provided, That the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the 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 ." (Emphasis supplied) that Extelcom, like the above-named holders of similar franchises, has been paying the franchise tax equivalent to three percent (3%) of all gross receipts of its business transacted under its franchise, and subsequently, upon the implementation of Republic Act No. 7716 or the Expanded VAT Law, the 10% VAT prescribed under Section 102 of the Tax Code. In reply, please be informed that under BIR Ruling No. 014-95 dated February 8, 1995, which was reiterated in BIR Ruling No. 027-97 dated March 31, 1997, the Commissioner of Internal Revenue, interpreting the "tax provision" clause of SMART's franchise, which is exactly the same provision as that found in the franchises of PILTEL and ISLACOM, ruled that: "The phrase "in lieu of all taxes" declares in effect that SMART, after paying a franchise tax equivalent to 3% of all gross receipts of the business covered by its franchise, may not be required to pay the documentary stamp tax imposed under Title VII of the Tax Code, as amended by RA No. 7660, on various documents, papers and instruments executed by it which are necessary in the conduct of its business covered by the franchise. This finds support in the case of the Philippine Railway Company vs. William T. Nolting, 34 Phil. 401, whereby the Supreme Court, in upholding the taxpayer's exemption from the documentary stamp tax on bills of lading it had issued, ruled that ". . . The phrase "all taxes of every name and nature" is a very inclusive statement, especially when it names, in connection therewith, the only governmental entities who have a right to collect taxes. It is not only all-inclusive, but it is also as well exceedingly exclusive. It not only includes all payments which may be regarded as taxes, but it excludes everything which might, by any possibility, be denominated taxes . . ." cdll Such being the case, EXTELCOM , after paying the 10% VAT, 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, inasmuch as EXTELCOM is exempt from paying the said tax, the other party to the taxable document, who is not exempt, shall be the one directly liable for the tax. Furthermore, like other holders of telecommunication franchises, EXTELCOM shall no longer be liable to the franchise tax equivalent to the 3% of all gross receipts of its business transacted under its franchise but shall now be liable to the 10% VAT on its gross receipts from the sale of telecommunication services prescribed under Section 108 of the Tax Code of 1997 as well as on its importation of all communications equipment and accessories for use in its business prescribed under Section 107 of the same Code. On the other hand, EXTELCOM shall remain liable to pay the following taxes, to wit: 1. Taxes on its real estate, building and personal property as other persons or telecommunication entities are now or hereafter may be required to pay; 2. 34% corporate income tax effective January 1, 1998 as provided for under Section 27(A) of the Tax Code of 1997 subject to a reduction of 1% annually until the taxable year 2000; 3. 20% final withholding tax on interest income on currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, and royalties derived from sources within the Philippines; 4. 7-% final withholding tax on interest income from a depository bank under the expanded foreign currency depository system; 5. Final tax on net capital gains from the sale, exchange or other disposition of shares of stock in a domestic corporation not traded in the stock exchange; 6. 6% final capital gains tax on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are treated as capital assets based on the gross selling price or fair market value of such lands and/or buildings, whichever is higher; 7. Creditable expanded withholding tax (EWT) on sales, exchanges or transfers of real properties classified as ordinary assets; 8. 2% minimum corporate income tax (MCIT) of the gross income as of the end of the taxable year when the minimum income tax is greater than that of the tax computed under Section 27(A) of the Tax Code of 1997; and 9. All other income taxes as provided for and imposed under Title II of the Tax Code of 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)