BIR Ruling [DA-192-96]

June 10, 1996 BIR RULING [DA-192-96] Hon. Ruben D. Torres Executive Secretary Office of the President Malacaang S i r : This refers to your proposed letter dated December 24, 1995 addressed to Atty. Kenny H. Tantuico of the CUEVAS DE LA CUESTA & DE LAS ALAS Law Offices, in effect granting the request of Philippine Wireless, Inc. (PWI) for exemption from customs duties, taxes and assessments on importation of radio equipment, message handling equipment, pagers, machineries, accessories, spare parts and all other goods and articles used in connection with its business conducted under its franchise, including value-added tax (VAT). A xerox copy of said letter together with your Memorandum for the President were furnished this Office for our information. It is noted that the proposed action cited BIR Ruling No. UN-035-94 dated February 3, 1994 (not January 25, 1995) issued to Pilipino Telephone Corporation (PILTEL) wherein it was ruled that "The "in lieu of all taxes" provision under Section 6 of RA 7293 clearly exempts PILTEL from all taxes including the 10% value-added tax (VAT) prescribed by Section 101 (a) of the same Code on its importations of equipment, machinery and spare parts necessary in the conduct of its business covered by the franchise, except the aforementioned enumerated taxes for which PILTEL is expressly made liable". In connection therewith, please be informed that the adverted ruling has already been modified by BIR Ruling No. 110-95 dated July 25, 1995, pertinent portions of which are hereby quoted, viz: cdt However, the preferential tax clause in your franchise stating that "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 business transacted under this franchise by the grantee, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof" shall be understood as written, which means that a 3% franchise tax shall be collected as substitute for any internal revenue taxes other than those enumerated in items 1 to 6 above imposed on your franchise or gross receipts/earnings thereof, e.g., VAT on sale of services, or tax on overseas dispatch, message or conversation transmitted from the Philippines prescribed under Sections 102 and 118 of the Tax Code, as amended. VAT on importations under Section 101 (a) of the same code is neither a tax on franchise nor on gross receipts or earnings thereof. It is a tax on the privilege of importing goods whether or not the taxpayer is engaged in business, and regardless of whether the imported goods are intended for sale, barter, or exchange, or for personal use . Importation for personal use covers importation of capital equipment, or any other goods to be used in the taxpayer's business, not necessarily intended for sale, barter, or exchange and regardless of whether the taxpayer's business is VAT-registrable or not. In other words, VAT under Section 101 (a) of the Tax Code, as amended, replaced the advance sales tax and compensating tax under then Sections 183 (b) and 199 respectively, of the old Tax Code. Accordingly, the aforesaid 3% franchise tax did not substitute the 10% value-added tax on your importations of articles like the communications equipment and accessories including but not limited to cellular phones". The inevitable conclusion of the foregoing is that PILTEL is subject to the value-added tax on its importations of radio equipment and accessories including but not limited to cellular phones for use in its business. It may be stated also that similar revocatory ruling have been issued to Smart Information Technologies, Inc. (SMART) regarding its exemption from VAT on importation of equipment, machineries and spare parts. Needless to state, franchise grantees, except electric, gas and water utilities franchise grantees, are now subject to the 10% value added tax imposed under Section 102 (a) of the Tax Code, as amended by R.A. No. 7716 otherwise known as the Expanded Value-Added Tax law, beginning January 1, 1996 but are no longer subject to the franchise tax. However, the "in lieu of all taxes" provision in the franchise of a franchise grantee is not affected by the Expanded VAT law since VAT merely replaced the franchise tax. In other words, VAT instead of the franchise tax shall be "in lieu of all taxes" due from a franchise grantee like Philippine Wireless, Inc. (PWI). (RMC No. 5-96 dated January 15, 1996) In view of the foregoing, it is requested that the proposed action exempting Philippine Wireless, Inc. (PWI) from the 10% value-added tax imposed under Section 101 (a) of the Tax Code, as amended by R.A. No. 7716, on its importation of radio equipment, message handling equipment, pagers, machineries, spare parts and all other goods and articles used in connection with its business, should not and cannot be given due course since it has no legal basis and clearly violative of R.A. 7716. casia Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue