BIR Ruling [DA-307-04]

June 4, 2004 BIR RULING [DA-307-04] R.A. No. 7372; BIR Ruling No. DA-97-03 Salalima Gonzales & Castelo Law Offices 5/F, Globe Telecom Plaza Pioneer cor. Madison Streets Mandaluyong City Attention: Atty. Melchor S. Latina Gentlemen : This refers to your letter dated May 5, 2004 requesting on behalf of Innove Communications, Inc. (Innove) , for a confirmation of your opinion that Innove is not liable to pay documentary stamp tax imposed under Title VII of Republic Act No. 83424, otherwise known as the Tax Reform Act of 1997, on various documents, papers, and instruments executed by it in pursuance of its business covered by its franchise in view of the "in lieu of all taxes" clause under its franchise and the equality of treatment clause under Republic Act No. 7925, otherwise known as the Telecommunication Policy Act of the Philippines. It is represented that Isla Communications Co., Inc., the predecessor of Innove Communications, Inc. and the franchise grantee under Republic Act (R.A.) No. 7372, is enfranchised to install, operate and maintain telecommunications services within the territory of the Republic of the Philippines and international points and for other purposes; that the scope of the right, authority and privilege granted under the franchise is provided under Section 1 thereof; that Section 14 of the said franchise provides, viz : Sec. 14. 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 to 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Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. cIADTC The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code. The return shall be subject to audit by the Bureau of Internal Revenue." and that on August 21, 2003, the Securities and Exchange Commission (SEC) approved the change of name from Isla Communications Co., Inc. to Innove Communications, Inc. after Innove became a 100% subsidiary of Globe. In reply, please be informed that in CTA Case No. 45 dated February 8, 1956, entitled " Philippine Air Lines, Inc. vs. Collector of Internal Revenue ," the CTA ruled that a provision of law imposing a tax in lieu of all taxes of any kind, nature or description, has been generally considered a commutation tax, that is, it is a combination of two or more taxes, as an excise tax or franchise tax, payment of which would give rise to a privilege exemption from all other taxes (12 C.J. 216 and BIR Ruling No. UN035-94 dated February 3, 1994). The phrase "in lieu of all taxes" under R.A. No. 7372 declares in effect that Innove (formerly Isla Communications Co., Inc.) 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 Innove 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-097-2003 dated March 27, 2003). Moreover, Section 23 of R.A. No. 7925 otherwise known as the Telecommunication Policy Act of the Philippines provides, 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 franchisee: 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." Accordingly, the tax exemption privileges granted to Innove's competitors in the business covered by their respective franchises shall automatically become part of Innove's franchise and shall operate equally in its favor. In view of the foregoing, this Office confirms your opinion that Innove Communications, Inc. is not liable to pay documentary stamp tax imposed under Title VII of the Tax Code of 1997 on various documents, papers, and instruments executed by it in pursuance of its business covered by its franchise. 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. cSITDa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group