BIR Ruling [DA-560-99]

September 29, 1999 BIR RULING [DA-560-99] Castro Cadiz & Carag Law Offices Suite 25PC, Eisenhower Condominium No. 7 Eisenhower Street, Greenhills San Juan, Metro Manila Attention: Atty . Othelo C . Carag Gentlemen : This refers to your letter dated August 9, 1999, requesting a confirmation of your opinion regarding the proper tax base for purposes of computing the franchise tax and income tax on electric utilities. It is represented that your client, EAST ASIA POWER RESOURCES CORPORATION ("EAPRC") is a corporation engaged, through its subsidiaries, in power generation and accredited by the Department of Energy as a Private Sector Generation Facility ("PSGF") under Executive Order No. 215 (E.O. 215). As such, it is subject to the 2% franchise tax in addition to the 33% corporate income tax. LexLib You would like to seek a confirmation of your opinion that: "1. The "gross receipts" subject to the 2% franchise tax includes only amounts actually or constructively received by EAPRC and excludes accounts receivable and sales discounts given by EAPRC to its clients for prompt payment of the billed or invoiced amount. "2. For purposes of computing its taxable income subject to the corporate income tax, EAPRC may either deduct the sales discounts it gives to its clients either from its gross sales or deduct said sales discounts as business expense." In reply, please be advised that: 1. Pursuant to Section 119 of the Tax Code of 1997, the 2% franchise tax imposed on electric utilities is based on "gross receipts" derived from the business covered by the law granting the franchise. For this purpose, the term "gross receipts" means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person (BIR Ruling No. 029-98 dated March 19, 1998). In other words, the "gross receipts" subject to franchise tax includes only amounts actually or constructively received or collected by EAPRC from its clients. "Constructive receipt" occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service or sold the goods without restrictions by the payor. Amounts that have not been collected, although billed during the quarter shall not form part of the gross receipts subject to franchise tax for said quarter (BIR Ruling UN-198-7-6-94; PLDT Co. v. Collector of Internal Revenue, 98 Phil. 676). Accordingly, discounts granted by EAPRC to its clients do not form part of gross receipts, Similarly, accounts receivable or accounts which remain uncollected at the end of the quarter should not be declared for taxation during the quarter for purposes of the franchise tax. However, said amounts should be returned for taxation during the quarter in which they are collected and the tax due thereon paid within twenty-five (25) days after the end of the taxable quarter (Section 128(A)(1), Tax Code). 2. In computing its taxable income subject to the corporate income tax, EAPRC may deduct the sales discount from its gross income/sales/receipts to arrive at the taxable net income. Thus, sales discounts may either be recorded as a reduction in sales, or as an expense of the period, resulting to the same taxable net income (Section 27(A), Tax Code; Section 43, Income Tax Regulations; BIR Ruling No. 183-95 dated December 6, 1995; BIR Ruling No. 067-95 dated April 11, 1995). Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)