Sale of Microwave Backbone Transmission Network, an Isolated Transaction Not Subject to VAT

July 23, 1998 BIR RULING NO. 113-98 105-106-6-97, 033-97, 054-96-113-98 Liberty Broadcasting Network, Inc. 2298 Pasong Tamo Extension Makati City Attention: Mr . Rene Jose S . Domingo Executive Vice President Gentlemen : This refers to your letter dated June 18, 1997 requesting confirmation of your opinion that the sale of a microwave backbone transmission network by Liberty Broadcasting Network , Inc . (Liberty) , being an isolated transaction, is not subject to VAT. It is represented that Liberty, a corporation duly organized and existing under Philippine laws, holds a congressional franchise to provide the public with wireless radio communication services and to operate radio communication stations nationwide under Republic Act No. 1553, as amended by Republic Act No. 4154; that your company is currently engaged, among others, in providing services for public shared repeater communications, radio trunking, and store and forward communications fax business; that you are also operating and maintaining a satellite communications network utilizing hardware and technology where data and/or digitized sound are transmitted, in point to multi-point application, through a satellite link with nationwide application, and which is composed of, among others, the Network Control Center, Very Small Aperture Terminals (VSATs), and related technology to serve the general public; that your company is a wholly-owned subsidiary of Liberty Telecommunications Holdings, Inc., a holding company which went public in 1994 and thereat raised some P1.0 Billion from the investing public; that the IPO generated funds were largely utilized in your company's establishment of a nationwide microwave backbone transmission network; that your revenue comes from the telecommunications services you provide to your clients; that you are not engaged in the sale of goods or merchandise, nor are you deriving any rental income from any of your properties, whether real or personal; that you are VAT-registered under VAT Certificate of Registration No. 000-471-462, dated June 30, 1994, with respect to your sale of telecommunication services, and issued by BIR Revenue District No. 48; that pressures on your business occasioned by the need to remain competitive in your already crowded market require your company to further expand its existing facilities to create new and more technologically advanced services to your subscribers; that for said purpose, the company is constrained to raise funds; that to achieve this, you now intend to sell to another wireless communications carrier your microwave backbone transmission network which is comprised of various microwave equipment, cables, antennae, etc., which are located within your company's locations and sites deployed nationwide and the value of which comprises approximately 25% of your fixed assets; that the towers, power generating equipment, the land, buildings or leasehold rights, as well as all non-microwave radio transmission hardware and software, remain properties of your company and are not included in the sale; that the decision to sell the microwave backbone transmission work is the result of a long and tedious process; that you finally decided to proceed with the sale due to pressing financial need that must be filled, otherwise, you could face some financial and market competition problems; and that this is purely an isolated transaction and may never reoccur. In reply thereto, please be informed that any person who, in the course of trade or business, sells, barters or exchanges goods or properties shall be subject to a value-added tax equivalent to 10% of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. (Sections 105 and 106 of the Tax Code of 1997) The phrase " in the course of trade or business " means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto. Your intended sale of your microwave backbone transmission network to another wireless communications carrier is not in the course of your trade or business of selling telecommunication services. Neither is it incidental thereto since the same does not necessarily follow the primary function of selling telecommunication services. (Magsaysay Lines, Inc. et. al. v. Commissioner of Internal Revenue, CTA Case No. 4353, April 27, 1992) Accordingly, since the sale of the microwave backbone transmission network is just an isolated transaction, said sale is not subject to VAT. (BIR Ruling Nos. 6-97 dated January 17, 1997; 033-97 dated April 1, 1997; 054-96 dated May 14, 1996) Moreover, the subject sale shall not result in any input tax credit to the buyer. 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. LexLib Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue