BIR Ruling [DA-498-98]

November 17, 1998 BIR RULING [DA-498-98] Sycip Salazar Hernandez & Gatmaitan 105 Paseo de Roxas Makati City Attention: Attys . Ernesto S . Taio, Jr . and Carina C . Laforteza Gentlemen : This refers to your letter dated January 16, 1997 stating that your client, Cruz Telephone Company (Cruztelco), a corporation organized and existing under the laws of the Philippines is a grantee of a legislative franchise under R.A. No. 7961, which was approved on March 29, 1995 by the President of the Philippines, to install, operate and maintain a telecommunications system throughout the Philippines; that Section 9 of its franchise provides: asiadc "SEC. 9. Tax Provisions . The grantee shall be liable to pay the same taxes on its real estate, buildings and personal property, exclusive of this franchise, as other persons or corporation 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. 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; and the return shall be subject to audit by the Bureau of Internal Revenue." In this connection, you are requesting confirmation of your opinion that Cruztelco is subject to the following taxes: "1. Taxes on its real estate, buildings and personal property as other persons or corporations are now or hereafter may be required to pay; "2. 35% corporate income tax; "3. 20% final withholding tax on interest income derived from Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements, and royalties derived from sources within the Philippines; "4. Creditable expanded withholding tax on sales, exchanges or transfers of real properties (whether classified as capital or ordinary asset) consummated on or after January 1, 1990; "5. Capital gains tax on capital gains realized from the sale, exchange or disposition of shares of stock in any domestic corporation under Sec. 24(e)(2) of the Tax Code, as amended; "6. All other income taxes as provided for and imposed under Title II of the Tax Code, as amended; "7. The 3% franchise tax on gross receipts which shall be in lieu of all taxes on its franchise or earnings thereof. However, Cruztelco is exempt from: "1. VAT on the sale of services; "2. VAT on the importation of equipment, machineries and spare parts; "3. Overseas telecommunications tax; "4. Documentary stamp taxes; and "5. Other taxes on its franchise or earnings. In reply, please be informed that Cruztelco is subject to the following taxes: 1. Taxes on its real estate, buildings and personal property as other persons or telecommunication entities are now or hereafter may be required to pay; 2. 34% corporate income tax effective January 1, 1998 as provided for under Sec. 27(A) of the Tax Code of 1997 subject to a reduction of 1% annually until the taxable year 2000 (Section 27(A) of the Tax Code of 1997); 3. 20% final withholding tax on interest income derived from currency bank deposit and yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements, and royalties derived from sources within the Philippines (Section 27(D)(1) of the Tax Code of 1997); 4. 7% final income tax on interest income from a depository bank under the expanded foreign currency depository system (Section 27(D)(1) of the Tax Code of 1997); 5. Capital gains tax realized from the sale, exchange or other disposition of shares of stock in a domestic corporation not traded through the stock exchange (Section 27(D)(2) of the Tax Code of 1997); 6. 6% final capital gains tax on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are treated as capital assets based on the gross selling price or fair market value of such lands and/or buildings, whichever is higher (Section 27(D)(5) of the Tax Code of 1997); 7. Creditable expanded withholding tax on sales, exchanges or transfers of real properties classified as ordinary assets (Revenue Regulations No. 12-94, as amended by Revenue Regulations No. 2-98); 8. 2% minimum corporate income tax (MCIT) of the gross income as of the end of the taxable year when the minimum income tax is greater than the tax computed under Sec. 27(A) of the Tax Code of 1997; and 9. All other income taxes as provided for and imposed under Title II of the Tax Code, as amended; Likewise, Cruztelco is subject to the 10% value-added tax (VAT) on its importations of equipment, machineries, spare parts and other accessories including but not limited to cellular phones for use in its business. In connection therewith, it may be stated that franchise grantees, except electric, gas and water utilities franchise grantees, are now subject to the 10% value-added tax imposed under then Section 102(a) of the Tax Code, as amended by R.A. No. 7716, otherwise known as the Expanded Value-Added law, beginning January 1, 1996 [now Section 108(A) of the Tax Code of 1997] 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 Cruztelco. (RMC No. 5-96 dated January 15, 1996) However, amounts received for overseas dispatch, message or conversation originating from the Philippines are still subject to the percentage tax under Section 120 of the Tax Code of 1997. Section 7 of R.A. No. 7961, the Charter of Cruztelco provides, viz: "If any subsequent franchise for telecommunications service is awarded or granted by the Congress of the Philippines with terms, privileges and conditions more favorable and beneficial than those contained in this Act, then the same privileges or advantages shall ipso facto accrue to the herein grantee and be deemed part of this Act." Section 9 of R.A. No. 8065, a subsequent franchise granted to Isla Cellular Communications, Inc. to construct, maintain, establish and operate commercial mobile and fixed wireless telecommunications in the Philippines, provides that: "SEC. 9. Tax Provisions . 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 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 at such percentage as may be prescribed by law on all gross receipts of the 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; 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. Moreover, Section 23 of R.A. No. 7925, also known as the "Public Telecommunications Policy Act of the Philippines", provides: "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 franchises." Thus, it will be observed that Cruztelco's franchise under R.A. No. 7961 contains the so-called " ipso facto " provision or the "most favored treatment clause." The rationale behind the "most favored treatment clause" is to place both competing groups or entities on equal footing and not to give one an advantage over the other. (cited in PT&T vs. COA, 146 SCRA 190, 195, Davao Light and Power Co., Inc. vs. Commissioner of Customs 44 SCRA 127) Documentary stamp tax are payable by the person making, signing, issuing, accepting, or transferring the document, wherever the document is made, signed, issued, accepted, or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and at the same time such act is done or transaction had: Provided, that whenever one party to the taxable document enjoys exemption from said taxes, the other party who is not exempt shall be the one directly liable for the tax. (Sec. 2, Revenue Regulations No. 9-94) Such being the case, and since the "in lieu of all taxes" provision in the franchise of Isla Cellular Communications, Inc. declares in effect that after paying a franchise tax on all gross receipts of the business covered by its franchise, Isla Cellular Communications, Inc. may not be required to pay documentary stamp tax imposed under Title VII of the Tax Code, as amended by R.A. 7660 on various documents, papers and instruments executed by it which are necessary in the conduct of its business covered by the franchise (BIR Ruling No. 014-95 dated February 18, 1995), the same should also be enjoyed by Cruztelco under the so-called "ipso facto" or the "most favored treatment clause" in its franchise. However, since Cruztelco is exempt from the documentary stamp tax imposed under Title VII of the Tax Code, as amended by R.A. 7660 on various documents, papers and instruments executed by it which are necessary in the conduct of its business covered by the franchise, the other party to the taxable document who is not exempt shall be the one directly liable for the tax. (BIR Ruling No. 027-97 dated March 31, 1997) Cruztelco may register as a VAT taxpayer and pay 10% value-added tax instead of the 3% franchise 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 null and void. LLjur Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)