Bayantel's Acquisition of RCPI Assets Not Subject to VAT

December 13, 1999 BIR RULING NO. 200-99 200-99 Sycip, Gorres, Velayo & Co 6760 Ayala Avenue Makati, Metro Manila Attention: Atty . R . M . C . Vinzon Tax Division Gentlemen : This refers to your letter dated January 12, 1999 requesting confirmation of your opinion that the transaction involving the acquisition by your client, Bayan Telecommunications, Inc. (Bayantel), of the assets of Radio Communications of the Philippines, Inc. (RCPI), being a transfer not in the regular course of trade or business of RCPI, is not subject to VAT. It is represented that RCPI and Bayantel are corporations duly organized and existing under and by virtue of Philippine laws; that both RCPI and Bayantel are subsidiaries of Bayantel Holdings Corporation (BHC) and are engaged in identical activities, particularly in the form of providing telephone services, both international and local, to the general public; that in order to rationalize and streamline the operations of both companies, BHC intends to restructure the operations of both Bayantel and RCPI under the Bayantel Corporate Restructuring; that under the restructuring plan, RCPI's long distance telephone operations will be transferred to Bayantel, thus limiting RCPI's operations to the so-called "public calling offices"; that one of the major steps under the restructuring plan will require the transfer to Bayantel of RCPI's major telecommunications assets which will no longer be needed in the operation of RCPI's "public calling offices"; that under the transfer arrangement, Bayantel's acquisition of RCPI's assets will be in exchange for the assumption of an equal amount of RCPI's debt; that these assets consist of the following: switching equipment, transmission equipment (relay communications tower, power generation and supply systems, digital microwave radio systems), outside plant facilities, cable and wire facilities, terminal equipment, office equipment, furniture and fixtures, computers, transportation equipment, tools and testing equipment, and other property and equipment; that in addition to the foregoing assets, circumstances may require Bayantel's acquisition of the following additional assets: receivables (trade, intercompany accounts), materials and office supplies, technical supplies and spare parts, prepayments (advances to suppliers, etc.); that the intended transfer by RCPI under the Bayantel Corporate Restructuring of the foregoing asset is not included for profit or livelihood and that the transfer of assets pursuant to the corporate restructuring is not a sale, barter, exchange or transfer of properties "in the course of trade or business" of RCPI. In reply, 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, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or theirs guests), or government entity. The phrase "in the course of trade or business" is thus restricted to activities or affairs where profit is the purpose, or livelihood is the motive (Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 104151, March 10, 1995) Considering that the intended transfer of assets under the Bayantel Corporate Restructuring Plan is not intended for profit or livelihood, such transfer may not be said to be in the ordinary course of business of RCPI. Moreover, the intended transfer of RCPI's assets to Bayantel is not in the course of RCPI's regular trade or business of selling telecommunication services to the public. Neither is the transfer incidental thereto since the same is not necessary to carry out RCPI's primary function of providing telecommunication services to the general public. The intended act of transferring the assets does not follow the act of providing telecommunications services to the public (Magsaysay Lines, Inc. et al. v. Commissioner of Internal Revenue, CTA Case No. 4353, April 27, 1992). Consequently, such transfer shall not be subject to VAT.(BIR Ruling Nos. 006-97 dated January 17, 1997; 033-97 dated April 1, 1997; 054-96 dated May 14, 1996; 113-98 dated July 23, 1998) Moreover, the intended transfer arrangement shall not result in any input tax credit to Bayantel. 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