Exemption of Gross Receipts from Franchise Tax

March 2, 1988 BIR RULING NO. 066-88 227 075-83 066-88 Gentlemen : This refers to your letters dated December 22, 1987 and January 20, 1988 requesting confirmation of your opinion to the effect that the following gross receipts of your client, Philippine Global Communications, Inc. (PHILCOM) viz: 1. Gain on foreign exchange; 2. Gain on special projects to customers; 3. Gain on sale of supplies which is the difference between the billed price and average cost of supplies; 4. Gain on sale of property consisting of junked and retired equipment; 5. Rental of building; 6. Allowance for fund used during construction/installation; 7. Interest income on overdue account which means interest billed to customers for late payment of their accounts; 8. Interest income on savings deposits. are considered extraneous income; hence should not be subject to the franchise tax. In reply, I have the honor to inform you that the business of your client under its franchise consists of constructing, maintaining and operating an international communication system and that it is subject to franchise tax on all gross receipts derived from business transacted under said franchise. [Sections 1 and 8(b), Republic Act No. 4617] It has been held that earnings or profits incidental to and necessarily connected with the operation of the franchise, are subject to franchise tax (Phil. Power Development Co., Inc. vs. Commissioner, CTA Case No. 1152, Oct. 31, 1965; BIR Ruling No. 388-87) Likewise, interest income on savings deposit made in the regular transactions in connection with the franchise is subject to franchise tax. (BIR Ruling No. 167-81) All other income derived from any activity or business not specified by the franchise are extraneous income which are not subject to the franchise tax. (BIR Ruling No. 075-83) Accordingly, the above items of income consisting of interest income on overdue accounts and savings deposits, gain or special projects and gain on sale of junked and retired equipment (Nos. 2, 4, 7 and 8) are subject to the franchise tax while the other items being extraneous income are not subject to the said tax. However, in view of Executive Order No. 72 subjecting all franchise grantees to income tax, the above items of income (Nos. 1, 3, 6, 7) are subject to the corporate income tax imposed by Section 24(a) of the Tax Code. The interest income derived by your client from savings deposit is subject to the 20% withholding tax, pursuant to Section 24(e) of the Tax Code, in relation to Sections 50 and 51 (formerly Sections 51 and 52) of the same Code, as amended by Executive Order No. 273. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner