BIR Ruling No. 214-15

June 19, 2015 BIR RULING NO. 214-15 Bienvenido A. Gemani 20 Palmario St. Malabon City Sir : This refers to your letter dated July 17, 2014 requesting for nullification of BIR Ruling No. DA-120-05 dated April 6, 2005. The said BIR Ruling discussed, among others, the tax treatment of the franchise tax imposed on electric utilities. You argue that the Bureau of Internal Revenue erred in ruling on this matter considering that the franchise tax is not a national internal revenue tax, hence, not within the jurisdiction of the Bureau. We deny your request for lack of legal basis. A plain reading of BIR Ruling No. DA-120-05 reveals that the franchise tax being discussed is the tax imposed under Title V of the National Internal Revenue Code (NIRC), specifically Section 119 thereof. BIR Ruling No. DA-120-05 reads in part: The 2% franchise tax just like other business tax (or percentage tax) is an indirect tax which is being assessed and collected from a franchise grantee or seller of services. Since, it is an indirect tax, the grantee who is the seller of the goods or services may pass on the amount of tax to the buyer. In short, it is the end-user/buyer who pays the amount not as a tax but as part of the cost of the goods or services purchased. Finally, unlike the value-added tax system where the input tax can be credited against the output tax, and refunds or tax credits of the input tax attributable to zero rated sales are allowed, Title V of the Tax Code of 1997 under which franchise taxes fall does not have this mechanism of crediting the taxes passed on (input) against the buyer's tax liability (output). The 2% franchise tax is imposed outright on the gross receipts of electric utilities without allowance for offsetting of any input taxes that may have passed on to it. Thus, while the 2% franchise tax passed on by MERALCO to PEZA-registered enterprises is a national internal revenue tax, the same cannot be credited against the tax liability of the buyer/user of the service who is subject to a preferential tax rate. As PEZA-registered enterprise, DAIWA SEIKO is exempt only from payment of internal revenue taxes on their gross income derived from their operations by paying the 5% preferential tax rate. Finally, it was never contemplated by RA 7916, as amended by RA 8748 to exempt PEZA registered enterprises from indirect taxes the payment of which lie primarily with the seller of goods or services. (Emphasis supplied) At the time BIR Ruling No. DA-120-05 was issued, Section 119 under Title V of the NIRC read: SEC. 119. Tax on Franchises . Any provision of general or special law to the contrary notwithstanding, there shall be levied, assessed and collected in respect to all franchises on radio and/or television broadcasting companies whose annual gross receipts of the preceding year does not exceed Ten million pesos (P10,000.00), subject to Section 236 of this Code, a tax of three percent (3%) and on electric, gas and water utilities, a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise: Provided, however, That radio and television broadcasting companies referred to in this Section shall have an option to be registered as a value-added taxpayer and pay the tax due thereon: Provided, further, That once the option is exercised, it shall not be revoked. (Emphasis supplied) DETACa Clearly, the franchise tax mentioned in BIR Ruling No. DA-120-05 is a national internal revenue tax and not a local tax. The premise of your argument that the franchise tax discussed in BIR Ruling No. DA-120-05 is a local tax, is therefore erroneous. We hope we have enlightened you on the matter. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue