BIR Ruling [DA-238-02]

December 17, 2002 BIR RULING [DA-238-02] Subic Bay Metropolitan Authority Building 229, Waterfront Road Subic Bay Freeport Zone Olongapo City Attention: Hon. Felicito C. Payumo Chairman/Administrator Gentlemen : This refers to your letter dated January 26, 2000 stating that on June 29, 1994, Subic Bay Metropolitan Authority (SBMA) entered into a Joint Venture Agreement (JVA) with Philippine Long Distance Telephone Company (PLDT) and AT&T International, Inc. for the Provision of Telecommunications Services, Establishment, Operation and Maintenance of Telecommunication Facilities, Networks, and Systems through the JVA company, SUBICTEL, within the Subic Freeport Zone; that this was made pursuant to SBMA's mandate/authority under Section 13(a) of R.A. 7227, which reads: "(3) to undertake and regulate the establishment, operation and maintenance of utilities . . . in the Subic Special Economic Zone" and (4) to construct, acquire, own, lease, operate and maintain on its own or through contract, franchise, license permits bulk purchases from the private sector and build-operate-transfer scheme or joint-venture the required utilities." that under the said JVA, SBMA, PLDT and AT&T have the following equity participation, to wit: SBMA 20% PLDT 40% AT&T 40% that being the regulator of telecommunications activities within the Zone, SBMA exercises the power to grant franchises, Certificates of Public Convenience and Necessity, licenses and permits to telecommunications companies desiring to operate within the Freeport Zone; that in line with the government's policy of privatization and non-competition with the private sector, and for the SBMA to effectively carry out its regulatory functions and considering that SBMA needs to liquidate some of its assets to generate badly-needed revenue, the SBMA Board passed a resolution authorizing the sale of the 20% shareholding consisting of 5,000,000 shares in SUBICTEL which was appraised by Asian Appraisal Company, Inc. to have a present value of P174,050,055.00 (high end)/P143,093,022.00 (low-end); that SBMA in accordance with the terms of the JVA and the Articles of Incorporation of SUBICTEL, offered on October 5, 1999 its shareholding to PLDT and AT&T for exercise of their rights of first refusal; that on October 15, 1999, PLDT responded with an offer of P180,000,000.00 while AT&T, on the same date, declined to exercise its right; that on October 17, 1999, the SBMA Board passed a resolution accepting PLDT's offer and notice thereof was served on PLDT on October 20, 1999; and that under the JVA and Articles, PLDT has sixty (60) days from October 21, 1999 or until December 20, 1999 within which to pay SBMA the purchase price of P180 Million. SATDEI In connection therewith, you now request for a ruling as to whether or not the sale by SBMA of its 20% shareholding in Subic Telecommunications Co., Inc. (SUBICTEL), to PLDT, is subject to capital gains tax imposed under Section 27(D)(2) of the Tax Code of 1997. In reply thereto, please be informed that Section 12(c) of R.A. No. 7227, as implemented by Revenue Regulations No. 1-95, as amended by Revenue Regulations No. 16-99 provides "(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas. In case of conflict between national and local laws with respect to the tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter." Furthermore, in BIR Ruling No. 129-96 dated November 26, 1996, it was held that "In view of the foregoing, and since the sale by SBWDC, a SBFZ enterprise, of its shares of stock in SBYC, another SBFZ enterprise, is considered a sale within the SBF zone, the proceeds of which, as represented, shall be utilized to cover the development and construction costs of SBYC's yacht club and other facilities in the complex within the zone, your opinion that the gain derived by SBWDC from the sale of SBYC shares of stock to third parties shall not be subject to the capital gains tax and documentary stamp tax imposed under the Tax Code, as amended, but to the preferential tax rate of 5% on gross income as contemplated under Section 12(c) of RA No. 7227 and as implemented by Section 6(a) in relation to Section 3(o) of Revenue Regulations No. 1-95, is hereby confirmed. Consequently, upon the sale of its SBYC shares, SBWDC should therefore file its return, pay its tax, and make the proper recording pursuant to Sections 7 and 8 of Revenue Regulations No. 1-95. "xxx xxx xxx' The aforementioned 5% preferential tax shall be lieu of all national and local taxes otherwise due from businesses and enterprises within the Subic Special Economic Zone. Such being the case, the sale by SBMA, of its 20% shareholdings consisting of 5,000,000 shares in SUBICTEL, to PLDT is exempt from capital gains tax imposed under Section 27(D)(2) of the Tax Code of 1997, but subject to the 5% tax on gross income under Section 12(c) of RA No. 7227. 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 & Inspection Group