BIR Ruling [UN-056-94]

February 11, 1994 BIR RULING [UN-056-94] 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 your request for confirmation of your opinion that your importations of communication equipment and accessories, including but not limited to cellular phones for use in connection with your franchised business are exempt from the value added tax imposed under Section 101 of the Tax Code, as amended. It appears that SMART is a grantee of a legislative franchise under Republic Act No. 7294 approved on March 27, 1992, to establish, install, maintain, lease and operate integrated telecommunications, 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). Pertinent portion of Republic Act No. 7294 provides 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 tax 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 or 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Internal Revenue Code, pursuant to Section 2 of Executive Order No. 72, unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. . ." Under the above-quoted provision of the franchise charter, SMART shall be subject only 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; 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); 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. SMART shall be constituted as withholding agent for the government if it acts as an employer and its employees received compensation income subject to the withholding tax under Section 72(a), Chapter 10, Title II of the NIRC, as implemented by Revenue Regulations No. 6-82 as amended, or if it makes income payments to individuals or corporations subject to the expanded withholding tax pursuant to Section 50(b) of the NIRC, as amended, and as implemented by Revenue Regulations No. 6-85, as amended. The "in lieu of all taxes" provision under Section 9 of R.A. No. 7294 clearly exempts SMART from all taxes including the 10% value-added tax (VAT) prescribed by Section 101(a) of the same Code on its importations of equipment, machinery and spare parts necessary in the conduct of its business covered by the franchise, except the aforementioned enumerated taxes for which SMART is expressly made liable. In the case of the Philippine Airlines (CTA Case No. 45, February 28, 1956),the Court ruled that a provision of law imposing a tax in lieu of all taxes of any kind, nature or description, been generally considered a commutation tax, that is, it is a combination of two or more taxes, as an excise or franchise tax, payment of which would give rise to a privilege exemption from all taxes. In the case of the Philippine National Railways vs. Nolting (34 Phil. 401),the Supreme court held that the "in lieu of" clause in PNR's franchise exempted it from the documentary stamp tax imposed on bills of lading issued by railway companies. PNR's franchise provided that the annual payments for which PNR is liable, when promptly and fully made, "shall be in lieu of all taxes" of every name and nature, municipal, provincial or central upon its capital stock, franchise, right of way, earnings and all other property owned or operated by the grantee, under this concession of franchise. In upholding PNR's exemption from DST on bills of lading it had issued, the Supreme Court said: "The phrase "all taxes of every name and nature" is a very inclusive statement, especially when it names, in connection therewith, the only governmental entities who have a right to collect taxes. It is not only all inclusive, but it is also, as well exceedingly exclusive. It not only includes all payments which might be regarded as taxes, but it excludes everything which might by any possibility, be denominated taxes ..." Thus, when Congress provided in Section 9 of R.A. 7294 for the taxes SMART shall be liable and that payment of the franchise tax of 3% shall be in lieu of all taxes, the lawmakers had intended that VAT which is excluded from the enumeration of taxes it shall pay, is deemed included in the term taxes of the "in lieu of" clause to which SMART shall not be subject. Otherwise, it would leave no exemption privilege at all to SMART, despite the preferential taxes mandated by the special law to be paid by it, as a consideration of the franchise grant. The Office of the President in its letter dated August 1, 1978 (Opinion No. 885 s. 1978) in the case of Manila Jockey Club, Inc. (MJCI) stated among others: "A franchise is a contract under which the State for a consideration confers certain rights and privileges to the grantee. This as it may, the State would vary the terms of the agreement if it were to withdraw the tax exemption it granted to MJCI, thus doing violence to the Constitutional mandate "that no law shall be passed impairing the obligation of contract".Moreover, authorities all agreed that a tax exemption based on contract and granted for sufficient consideration is irrevocable (2 Cooley Taxation ed.,1473-1474, cited in Alejandro Law on Taxation, 70 ed.,p. 65666) In view thereof, this Office is of the opinion, as it hereby holds, that SMART is exempt from VAT on its importation of communications equipment and accessories, including but not limited to cellular phones, needed in its franchise operations. (BIR Ruling No. UN-035-94) Very truly yours, JAIME M. MAZA Assistant Commissioner (Legal Service)