BIR Ruling [DA-344-03]

October 7, 2003 BIR RULING [DA-344-03] RA 7916; RA 7227; RR 33-99 dtd. 3-23-99 Philippine Long Distance Telephone Company 15th Floor, Ramon Cojuangco Building Makati Avenue, Makati City Attention: Atty. Kathyrn Ang-Zarate Head Tax Planning Center Gentlemen : This refers to your letter dated July 5, 2002 requesting for a confirmation of your opinion that Philippine Long Distance Telephone Company's (PLDT) sales of telecommunication services to enterprises registered with the Philippine Economic Zone Authority (PEZA), Subic Bay Metropolitan Authority (SBMA), Clark Development Authority (CDA), and Zambo Ecozone Authority and Freeport (ZEAF) are subject to value added tax (VAT) at zero percent rate and exempt from overseas communications tax, regardless of where the landlines are installed. It is represented that the Philippine Long Distance Telephone Company (PLDT) is a domestic corporation duly organized and existing under the laws of the Philippines with principal office located at the Ramon Cojuangco Building, Makati Avenue, Makati City; that it is duly licensed to operate a telecommunications system in the Philippines by virtue of a legislative franchise issued on November 28, 1928 under Act No. 3436, as amended by Commonwealth Act No. 407 and further amended by Republic Act No. 6146 and Republic Act No. 7082; that PLDT provides telecommunication services to various subscribers within the Philippines; that its subscribers include enterprises registered with the PEZA ("PEZA Enterprises"), SBMA, CDA, and ZEAF ("SBF Enterprises"); that these PEZA Enterprises and SBF Enterprises (collectively referred to as "Special Enterprises") maintain landlines located within the Economic or Freeport Zone and/or at their administrative offices which may be outside the Economic or Freeport Zone or within the Customs Territory; and that these landlines, whether located within or outside the Ecozone are used by the Special Enterprises either for local and overseas communications in connection with their registered business with the appropriate Ecozone Authority. As legal basis of your opinion, the following grounds were cited, to wit: A. Sale of Local and National Telecommunications Services 1. The Special Enterprises are granted preferential tax rates of 5% in lieu of local and national internal revenue taxes pursuant to their respective special laws, particularly Republic Act No. 7916 ("PEZA Law"), Republic Act No. 7227 ("BCDA Law"), Executive Order No. 80 in relation to the BCDA Law, and Republic Act No. 7903. 2. Sec. 108 (B) (3) of the Tax Code provides that "Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate." 3. Section 3 of Revenue Memorandum Circular No. 74-99 dated October 15, 1999 provides that the sale of services made by a VAT registered supplier from the Customs Territory to a PEZA registered enterprise shall be automatically subject to the zero percent VAT under the Cross Border Doctrine. This doctrine was enunciated in VAT Ruling No. 001-2000 dated January 6, 2000. In BIR Ruling No. 74-2000 dated December 22, 2000, the sale of personal computers (PC) by a VAT-registered enterprise to a PEZA-registered firm was subjected to zero rate even when such PCs will be delivered to the homes of the employees of the registered firm. CAIHTE B. Overseas Communications Tax 1. The Special Enterprises are exempt from the overseas communications tax under Section 120 (A) of the Tax Code because said enterprises are liable to pay 5% final tax based on gross income in lieu of all taxes, national or local. Under Section 2 (h) of Revenue Regulations No. 12-97, "national taxes" shall refer to all internal revenue taxes, including the regular income taxes, otherwise due and collectible from a registered ECOZONE enterprise under the National Internal Revenue Code and customs duties and import charges under the Tariff and Customs Code. In reply, please be informed that the special tax incentives only apply in respect of the registered enterprise's operations within the ECOZONE. Revenue Memorandum Circular No. 74-99 dated October 15, 1999 clearly states the policy regarding such incentives, to wit: "SECTION 2. Background. In general, enterprises registered and operating under the said Act, otherwise known as ECOZONE or PEZA registered enterprises, shall only be imposed with a 5% special tax, based on "gross income earned" in lieu of all taxes, except the real property tax. However, this tax incentive only applies in respect of the registered enterprise's operations within the ECOZONE. The ECOZONES "are selected areas with highly developed or which have the potential to be developed into agro-industrial, industrial tourist/recreational, commercial, banking, investment and financial centers. An ECOZONE may contain any or all of the following: industrial estates, export processing zones, free trade zones, and tourist/recreational centers." (SEC. 4 (a), R.A. No. 7916)." (Emphasis supplied) Thus, any operation of the Special Enterprises outside the ECOZONE as defined under their respective special laws shall not be covered by the preferential tax rates and shall be subjected to the applicable internal revenue taxes. This principle was applied in VAT Ruling No. 065-97 dated October 30, 1997 where it was held that the lease of residential and business units located in Metro Manila by enterprises registered with the Philippine Export Zone Authority (PEZA) and Subic Bay Freeport Zone is subject to VAT. Since the real property under lease is located outside of the PEZA and SBMA zones, it was ruled that the laws granting preferential tax treatment do not apply. In BIR Ruling No. 033-99 dated March 23, 1999, it held that the lease by a PEZA registered enterprise of a Liaison office space and Expats house which are located outside the PEZA boundaries is subject to the 10% VAT. The said ruling also made it clear that the sale of services to PEZA-registered enterprises, for income and VAT purposes, should be rendered within the PEZA boundaries to be entitled to the benefits of Section 24 of R.A. No. 7916. With respect to the 10% overseas communication tax, BIR Ruling 204-99 dated December 27, 1999 has already held that the exemption of Special Enterprises from OCT is limited to overseas calls emanating from landlines installed within the premises and registered under the names of the Special Enterprises located and registered within the enclaves of the freeport and economic zones as authorized under R.A. Nos. 7916 and 7227. In view of the foregoing, your request is hereby denied for lack of legal basis. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group