BIR Ruling No. 019-09

October 14, 2009 BIR RULING NO. 019-09 R.A. 9511; 000 Tan & Concepcion Law Offices Suites 1501-1502 The Orient Square Building F. Ortigas, Jr. Road, Ortigas Center 1661 Pasig City Attention: Atty. Fe L. Concepcion Gentlemen : This refers to your letter dated 4 March 2009 stating that your client, National Grid Corporation of the Philippines [NGCP], the project company organized by the consortium which won the bidding conducted by the Power Sector Assets and Liabilities Management Corporation [PSALM] for the privatization, by concession, of the assets and business of the National Transmission Corporation [TRANSCO] pursuant to the mandate under the Electric Power Industry Reform Act of 2001 [EPIRA], is a grantee of a legislative franchise under Republic Act No. 9511, signed by the President of the Philippines on 1 December 2008 and took effect on 20 December 2008, after due publication. Section 9 of its franchise provides, to wit: "SEC. 9. Tax Provisions. In consideration of the franchise and rights hereby granted, the Grantee, its successors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts derived by the Grantee from its operation under this franchise. Said tax shall be in lieu of income tax and any and all taxes, duties, fees and charges of any kind, nature or description levied, established or collected by any authority whatsoever, local or national, on its franchise, rights, privileges, receipts, revenues and profits, and on properties used in connection with its franchise, from which taxes, duties and charges, the Grantee is hereby expressly exempted: Provided, that 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 corporations are now or hereby may be required by law to pay; Provided, further, That payment by Grantee of the concessions fees due to PSALM under the concession agreement shall not be subject to income tax and value-added tax (VAT)." Your letter also states that NGCP deposits all its revenues and receipts in banks and other financial institutions and keeps them in interest earning bank accounts, money market placements, deposits substitutes, trust funds, and similar arrangements for safekeeping pending the use of those cash assets for its operations, maintenance, capital expenditures and, if there is available unrestricted retained earnings for dividend declaration. Furthermore, some of these cash assets are converted to foreign currencies for payment of importation of machineries and equipment needed for the maintenance, operation and expansion of the national transmission grid of the Philippines. Pending the use of such foreign currencies, they are deposited in foreign currency accounts with banks and other financial institutions, including banks with foreign currency deposit units (FCDUs), depositary banks under the expanded foreign currency deposit system, and offshore banking units (OBUs) for safekeeping. Based on the foregoing representations, you now request confirmation of your opinion that the 3% franchise tax to which NGCP is subject under the afore-quoted Section 9 is in lieu of any and all taxes of any kind and nature levied, established or collected by the BIR, under the Tax Reform Act of 1997, on its franchise, rights, privileges, receipts, revenues and profits, and on properties used in connection with its franchise, from which taxes, duties and charges, NGCP is expressly exempted. As such, NGCP is not subject to the following: DSCIEa 1. The 20% final withholding tax [FWT] on interest income derived from Philippine currency bank deposits and yield from deposit substitutes, trust funds and similar arrangements derived from sources within the Philippines. 2. The 7 1/2% FWT on interest income, and yield from deposit substitutes, trust funds, similar arrangements and other transactions with OBUs and depository banks under the expanded foreign currency deposit system. 3. The documentary stamp tax imposed under Sections 179 and 180 of the Tax Reform Act of 1997, on those deposits, deposit substitutes, trust funds and similar instruments. In reply, please be informed that under BIR Ruling No. 097-94 dated April 13, 1994, reiterated in BIR Ruling [DA-285-03] dated August 29, 2003, interpreting a similar "in lieu of all taxes" provision of Section 13, Presidential Decree [PD] No. 1590, granting a franchise to the Philippine Airlines [PAL], this Office had occasioned to rule that: "The 'in lieu of all taxes' clause under the above-quoted provision of Section 13 of P.D. 1590 clearly exempts PAL from all taxes including documentary stamp tax on bank notes/documents executed by it in favor of the Philippine National Bank, Landbank and such other banks, necessary in the conduct of its business covered by the franchise, except the aforementioned tax on its real property for which PAL is expressly made liable. This matter has been ventilated in your very own CTA Case No. 45 dated February 28, 1956 wherein the Court of Tax Appeals 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 or franchise tax, payment of which would give rise to a privilege exemption from all other taxes. In the case of the Philippine National Railways vs. Nolting (34 Phil. 401), the Supreme Court held that the 'in lieu of' clause in PNR's franchise exempted it from the documentary stamp tax imposed on bills of lading issued by railway companies. PNR's franchise provided that the annual payment for which PNR is liable, when promptly and fully made 'shall be in lieu of all taxes of every name and nature, municipal, provincial or central upon its capital stock, franchise, right of way, earnings and all other property owned or operated by the grantee, under this concession or franchise. In upholding PNR's exemption from DST on bills of lading it had issued, the Supreme Court said: The phrase 'all taxes of every name and nature' is a very inclusive statement, especially when it names, in connection therewith, the only government entities who have a right to collect taxes. It is not only all-inclusive, but it is also as well exceedingly exclusive. It not only includes all payments which might be regarded as taxes, but it excludes everything which might by any possibility, be denominated taxes . . ." The recent case of Commissioner of Internal Revenue (CIR) vs. Philippine Airlines, Inc. (PAL), 504 SCRA 90, October 9, 2006, interpreted a similar "in lieu of all taxes" provision contained in Presidential Decree (PD) No. 1590, PAL's franchise, in affirming the Court of Appeals' decision: (a) declaring PAL to be exempt from "all other taxes'', including the 20% final withholding tax on bank deposits, and (b) directing the CIR to refund to PAL the 20% final withholding tax collected and deducted by depository banks on the latter's interest income, or, in the alternative, to allows the petitioner a tax credit for the amount of the same. CaAIES Said the Supreme Court through then Chief Justice Panganiban: "A franchise tax is a legislative grant to operate a public utility. Like those of any other statute, the ambiguous provisions of a franchise should be construed in accordance with the intent of the legislature. In the present case, Presidential Decree No. 1590 granted Philippine Airlines an option to pay the lower of two alternatives: (a) the basic corporate income tax based on PAL's annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code, or (b) a franchise tax of two percent of gross revenues. Availment of either of these two alternatives shall exempt the airline from the payment of "all other taxes," including the 20 percent final withholding tax on bank deposits." xxx xxx xxx "A careful reading of Section 13 rebuts the argument of the CIR that the 'in lieu of all other taxes' proviso is a mere incentive that applies only when PAL actually pays something. It is clear that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise. Either option excludes the payment of other taxes and dues imposed or collected by the national or local government. It is not the fact of tax payment that exempts it, but the exercise of its option. While the Court recognizes the general rule that the grant of tax exemptions is strictly construed against the taxpayer and in favor of the taxing power, Section 13 of the franchise of respondent leaves no room for interpretation. Its franchise exempts it from paying any other tax other that the option it chooses: either the 'basic corporate income tax' or the two percent gross revenue tax." When the law uses language as broad and all-embracing as that employed in the afore-quoted Section 9, RA No. 9511 [NGCP's franchise], the conclusion is inescapable that the manifest legislative intent is to exempt the grantee from all kinds of burdens imposed by the government. As held by the Supreme Court in the PRC v. Nolting case afore-cited: "Statutes which are plain and specific should be given an interpretation according to their terms. There is nothing obscure or indefinite in the language used in Act No. 1497. The language is plain and unambiguous. The plaintiff had a right to believe, when it accepted said contract, that it would be relieved of all of the burdens imposed by the Government, when it promptly and fully paid the amounts imposed by said Section 13 [No. 13 of section 1]." Considering the above provision of NGCP's franchise to the effect that its payment of the 3% franchise tax prescribed therein shall be in lieu of income tax and any and all taxes, duties, fees and charges of any kind, nature or description levied, established or collected by any authority whatsoever, local or national, on its franchise, rights, privileges, receipts, revenues and profits, and on properties used in connection with its franchise, from which taxes, duties and charges, NGCP is expressly exempted, your following opinions are hereby CONFIRMED: 1. The 3% franchise tax which is based on all gross receipts derived by the grantee from its operations under the franchise to which NGCP is subject under the afore-quoted Section 9 is in lieu of any and all taxes of any kind and nature levied, established or collected by the BIR, under the Tax Code of 1997, on its franchise, rights, privileges, receipts, revenues and profits, and on properties used in connection with its franchise. 2. NGCP is not subject to the 20% final withholding tax [FWT] on interest income derived from Philippine currency bank deposits and yield from deposit substitutes, trust funds and similar arrangements derived from sources within the Philippines. 3. NGCP is not subject to the 7 1/2% FWT on interest income, and yield from deposit substitutes, trust funds, similar arrangements and other transactions with OBUs and depository banks under the expanded foreign currency deposit system. 4. NGCP is not subject to the documentary stamp tax imposed under Sections 179 and 180 of the Tax Reform Act of 1997, on those deposits, deposit substitutes, trust funds and similar instruments. However, pursuant to Section 173 of the Tax Code of 1997, as amended, whenever one party to the taxable enjoyment 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 NGCP enjoys tax exemption by virtue of the 'in lieu of all taxes' provision of its legislative franchise, the other party to the taxable documents shall be directly liable to pay the 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. SCHIac Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue