PT&T Exempt from Payment of Documentary Stamp Tax on Various Documents, Papers and Instruments Executed by it Which are Necessary in the Conduct of its Business Covered by the Franchise

March 31, 1997 BIR RULING NO. 027-97 R.A. No. 7660 000-00 027-97 Alba Ledesma & Co. Unit 1011 Westgate Plaza H.V. dela Costa Street Salcedo Village, Makati City Gentlemen : This refers to your letter dated March 4, 1996 stating that your client, Philippine Telegraph and Telephone Corporation (PT&T) a corporation organized and existing under the laws of the Philippines is a grantee of a legislative franchise under R.A. No. 4161, as amended, to establish, install, operate and maintain in the Philippines wire and/or wireless telecommunications systems, lines, circuits and stations throughout the Philippines, for public domestic and international communications; that under its franchise, PT&T shall pay each year one and one-half per centum (1-%) of all gross receipts from business transacted under the franchise; that it is specifically provided in Sec. 14 of R.A. No. 4161 as amended by R.A. No. 5048 that PT&T's franchise shall not be interpreted to mean an exclusive grant of the privilege therein provided, however, in the event of any competing individual, partnership or corporation, receiving a similar permit or franchise with terms and/or provisions more favorable than those granted to PT&T or tending to place PT&T at any disadvantage, then such term or terms and/or provisions shall ipso facto become part of the terms and/or provisions of the franchise of PT&T and shall operate equally in its favor as in the case of said competing individual, partnership or corporation. cdt In connection therewith, you are requesting confirmation of your opinion that since the franchise of PT&T contains the so called "ipso facto" provision or the "most favored treatment clause" whatever Smart Communications, Inc. (SMART) a competing franchise grantee engaged in telecommunications business enjoys by way of exemption from the documentary stamp tax imposed under Title VII of the Tax Code, as amended, should also be enjoyed by PT&T. In reply thereto, please be informed that a comparative evaluation of the respective franchises of PT&T and Smart disclosed that both are competing communications outfits, licensed to establish, install, operate and maintain telecommunications systems/services throughout the Philippines for public domestic and international telecommunications. However, while Smart's franchise by its terms provide that it shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under the franchise and the said percentage shall be in lieu of all taxes on the franchise and the said percentage shall be in lieu of all taxes on the franchise or earnings thereof . . . the same provision does not obtain in PT&T franchise. PT&T's franchise granted under R.A. No. 4161 as amended 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 Smart declares in effect that after paying a franchise tax equivalent to 3% of all gross receipts of the business covered by its franchise, Smart 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 PT&T under the so called "ipso facto or the "most favored treatment clause" in its franchise. However, since PT&T is exempt from the payment of documentary stamp tax imposed under Title VII of the Tax Code, as amended by R.A. No. 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. In view thereof, PT&T is exempt from the payment of documentary stamp tax imposed under Title VII of the Tax Code, as amended by R.A. No. 7660 on various documents, papers and instruments executed by it which are necessary in the conduct of its business covered by the franchise. It may also be stated in the connection that under Republic Act No. 7716, otherwise known as the Expanded VAT Law, effective January 1, 1996, PT&T shall no longer be subject to the one and one-half per centum (1-) franchise tax on its gross receipts from business covered by the law granting its franchise but to the 10% VAT prescribed under Section 102 of the Tax Code, as amended. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue