Whether Importation of Communications Equipment and Accessories, Including but Not Limited to Cellular Phones, for Use in Connection with Franchised Business are Exempt from Value-Added Tax

August 8, 1995 BIR RULING NO. 119-95 24 101 (a) 000-00 119-95 Smart Information Technologies, Inc. (Smart) 11th Floor Doa Narcisa Building 875 Paseo de Roxas, Makati Metro Manila Attention: Mr . Tirso F . Tardesilla Corporate Controller Gentlemen : This refers to BIR Ruling No. UN-056-94 dated February 11, 1994, stating that your importation of communications equipment and accessories, including but not limited to cellular phones for use in connection with your franchised business are exempt from value-added tax. llcd It appears that said ruling was issued based on your representation that you are a grantee of a legislative franchise under Republic Act No. 7294 approved on March 27, 1992, to establish, install, maintain, lease and operate an integrated tele-communications, computer/electronic services and fixed mobile stations throughout the Philippines, for public, domestic and international telecommunications, and to install corresponding transmitting stations and receiving radio stations at such places in the Philippines as it may consider necessary and convenient; and that it was likewise granted by the National Telecommunications Commission (NTC) a provisional authority (PA) to establish, install, maintain, lease and operate nationwide an enhance cellular mobile telephone system (CMTS). In connection therewith, please be informed that after a restudy of the aforesaid ruling, this offices finds the same to be devoid of legal basis, insofar as it exempts from the value-added tax your importations of communications equipment and accessories, including but not limited to cellular phones for use in connection with your business operations. Pertinent portion of R.A. No. 7294, is quoted hereunder as follows: "Sec. 9. Tax Provisions . 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 persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise equivalent to three percent (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof. Provided, That the grantee, its successors of assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code, pursuant to Section 2 of Executive Order No. 72, unless the latter enacted is amended or repealed, in which case the amendments or repeal shall be applicable thereto . . .." Based on the aforequoted provision of your Charter, this Office reiterates that you are subject to the following taxes, to wit: 1. Taxes on its real estate, buildings and personal property as other persons or corporations are now or hereafter may be required to pay; 2. 35% corporate income tax as provided for under Section 24(a) of the Tax Code, as amended; cdtech 3. 20% final withholding tax (FWT) on interest income derived from Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements, and royalties derived from sources within the Philippines. (Section 24(e)(1), NIRC); 4. Creditable expanded withholding tax (EWT) on sales, exchanges or transfers of real properties (whether classified as ordinary or capital asset) by Smart consummated on or after January 1, 1990 (RMO 7-90, RR 1-90, as amended by RR 12-94); 5. Capital gains tax (CGT) on capital gains realized from sale, exchange or disposition of shares of stock in any domestic corporation under Section 24(e)(2) of the Tax Code, as amended; 6. All other income taxes as provided for and imposed under Title II of the Tax Code, as amended; and 7. The 3% franchise tax on gross receipts which shall be in lieu of all taxes on its franchise or earnings thereof. However, the preferential tax clause in your franchise stating that "a franchise tax equivalent to three per cent (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof" shall be understood as written, which means that a 3% franchise tax shall be collected as substitute for any internal revenue taxes other than those enumerated in items 1 to 6 above imposed on your franchise or gross receipts/earnings thereof, e.g., VAT on sale of services, or tax on overseas dispatch, message, or conversation transmitted from the Philippines prescribed under Sections 102 and 118 of the Tax Code, as amended, VAT on importations under Section 101(a) of the same Code is neither a tax on franchise nor on gross receipts or earnings thereof. It is a tax on the privilege of importing goods whether or not the taxpayer is engaged in business, and regardless of whether the imported goods are intended for sale, barter, or exchange, or for personal use . Importation for personal use covers importation of capital equipment, or any other goods to be used in the taxpayer's business, not necessarily intended for sale, barter, or exchange and regardless of whether the taxpayer's business is VAT-registered or not. In other words, VAT under Section 101(a) of the Tax Code, as amended, replaced the advance sales tax and compensating tax under then Sections 183(a) and 199, respectively of the old Tax Code. Accordingly, the aforesaid 3% franchise tax did not substitute the 10% value-added tax on your importations of communications equipment and accessories, including but not limited to cellular phones. This modifies BIR Ruling No. UN-056-94 issued to you on February 11, 1994 insofar as it exempts from the value-added tax, your importations of communications equipment and accessories including but not limited to cellular phones for use in your business. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue