BIR Ruling [DA-156-02]

September 11, 2002 BIR RULING [DA-156-02] 176; 173 DA-107-2001 Philippine Long Distance Telephone Company, Inc. 11th Floor, Ramon Cojuangco Building Makati Avenue, Makati City Attention: Atty. Kathryn Ang-Zarate Head-Tax Planning Center Gentlemen : This refers to your letter dated February 20, 2001 requesting for a confirmation of your opinion that the sale by AT&T Communications Services International, Inc. (AT&T) of its shares of stock in Subic Telecommunications Company, Inc. (SubicTel) to Philippine Long Distance Telephone Company, Inc. (PLDT) is not subject to any documentary stamp tax. It is represented that AT&T is a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, USA with principal office address at 412 Mt. Kemble Avenue, Morristown, New Jersey, USA; that AT&T has no branch and is not doing business in the Philippines; that AT&T is the registered and/or beneficial owner of Ten Million (10,000,000) common shares (inclusive of two (2) directors' qualifying shares) of SubicTel, each with a par value of Ten Pesos (P10.00) per share, which shares constitute forty percent (40%) of the subscribed and issued shares of the capital stock of SubicTel; that PLDT is a corporation organized and existing under the laws of the Philippines and duly authorized to render telecommunications services under its legislative franchise, Republic Act No. 7082; and that pursuant to a Deed of Absolute Sale of Shares executed by and between AT&T and PLDT, the former sold all its Ten Million (10,000,000) common shares of SubicTel to the latter. In reply, please be informed that pursuant to Section 176 of the Tax Code of 1997, the sale of shares of stock is subject to a documentary stamp tax (DST) at the rate of P1.50 on each P200, or a fractional part thereof, of the par value of such stock. Under the legislative franchise of PLDT, particularly Section 12 of Republic Act No. 7082, PLDT is subject to the franchise tax equivalent to 3% of all gross receipts of the telephone or other telecommunications business transacted under its franchise, and the said percentage shall be in lieu of all taxes on the franchise or earnings thereof. Upon the effectivity of Republic Act No. 7716, otherwise known as the EVAT Law on January 1, 1996, the value added tax replaced the franchise tax. In Revenue Memorandum Circular No. 5-96 dated January 15, 1996, it was clarified that the "in lieu of" provision in the charter of a franchise grantee is not affected by the Expanded VAT Law and that the VAT merely replaced the franchise tax. In other words, VAT, instead of franchise tax, shall be in lieu of all taxes due from a franchise grantee. Thus, BIR Ruling No. DA-272-2000 held that PLDT may not be required to pay 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 PLDT 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 Nos. DA-272-2000 dated June 28, 2000 and DA-234-97 dated July 9, 1997 ) On the other hand, the other party to the taxable document, AT&T, is a non-resident foreign corporation and as such, it is not subject to the DST for it is beyond the taxing jurisdiction of the Philippine tax authorities, since under its inherent limitations, taxation may only be exercised within the territorial jurisdiction of the taxing authority. ( BIR Ruling No. 007-00 dated January 5, 2000 and BIR Ruling No. DA-107-2001 dated June 1, 2001 ) In view of the foregoing, this Office hereby confirms your opinion that the sale by AT&T of its shares of stock in SubicTel to PLDT is not subject to any documentary stamp tax. 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 as null and void. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group