Grant of Preferential Tax Treatment of PLDT's IT Products and Metering Rates for Internet Users

April 13, 1998 BIR RULING NO. 038-98 108 (A) 120-000-00-38-98 Ms. Maria Asuncion Fernando Director IV Correspondence Office Office of the President Malacaang, Manila M a d a m : This refers to your letter dated January 5, 1998 wherein you referred to this Office an E-Mail sent to His Excellency, President Fidel V . Ramos , dated December 1, 1997, stating, in part as follows: " . . . REQUEST TO LOWER THE TAX FOR IT PRODUCTS AND TAKE A LOOK AT PLDT'S METERING RATE FOR INTERNET USERS. . . ." In reply, please be informed that Section 108(A) of the Tax Code of 1997 provides as follows: "Sec 108. Value-added tax on sale of services and use or lease of properties . "(A) Rate and Base of Tax . There shall be levied, assessed and collected a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. "The phrase ' sale or exchange of services ' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including . . . services of franchise grantees of telephone and telegraph , radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; . . . and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties." In relation to this, Section 4.102-1(f) of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97, provides, viz: "(f) Services of franchise grantees of telephone and telegraph, radio and/or television broadcasting and all other franchise grantees, except electric, gas and water utilities, shall be subject to VAT. . . . xxx xxx xxx "Franchise grantees of telephone and telegraph shall be subject to VAT on their gross receipts derived from their telephone, telegraph, telewriter exchange, wireless and other communication equipment services. However, amounts received for overseas dispatch , message , or conversation originating from the Philippines by telephone, telegraph, telewriter exchange, wireless and other communication equipment services are still subject to the 10% percentage tax on the amount paid for such services by the person paying for the services rendered and shall be paid to the person rendering the services who is required to collect and pay the tax within twenty (20) days after the end of each quarter pursuant to Sec. 117 of the Tax Code, as amended ( now Sec . 120 of the Tax Code of 1997 )." In view thereof, both PLDT's "International Trunkline (IT) products" and "Services to Internet users" fall within the contemplation of the term " sale or exchange of services " which are subject to VAT pursuant to Sec. 108(A) of the Tax Code of 1997 based on PLDT's "gross receipts" derived from telephone, telegraph, telewriter exchange, wireless and other communication equipment services because although said products involve the usage of "International Trunklines", in some cases, said services would still be considered as being rendered in the course of trade or business in the Philippines since the rendition of the same starts in the Philippines. However, overseas dispatch , message , or conversation originating from the Philippines thru the Internet or even thru the "International Trunklines" is subject to the 10% percentage tax based on the amount paid for such services payable by the Internet or Trunkline user/s to PLDT pursuant to Sec. 120 of the Tax Code of 1997. We regret to inform you, therefore, that unless our Tax Code is amended so as to accommodate the grant of preferential tax treatment of PLDT's IT products and metering rates for Internet users, we have no recourse but to apply the above-quoted provisions of the Tax Code of 1997. prcd Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue