BIR Ruling [UN-140-94]

April 19, 1994 BIR RULING [UN-140-94] Meer, Meer & Meer Attorneys At-Law 9th Floor, PLDT Building Legaspi St., Makati Metro Manila Attention: Atty . Antonio M . Meer Gentlemen : This refers to your letter dated March 15, 1994 requesting for confirmation of your opinion that Philippine Long Distance Telephone Company (PLDT), is exempt from the payment of value-added tax on its importations of equipment, machineries and spare parts. cdtech It appears that PLDT is a grantee of a legislative franchise to install, operate and maintain a telephone system throughout the Philippines under Republic Act No. 3436. Said franchise and the law granting the same have already been amended several times, and recently, the terms and conditions of the legislative franchise granted to PLDT under the various laws, were consolidated under Republic Act. No. 7082, which became effective on August 24, 1991. Under Republic Act No. 7082, PLDT was granted the following: ". . . the right, privilege, and authority to carry on the business of providing basic and enhanced telecommunications services in and between provinces, cities and municipalities in the Philippines and between the Philippines and other countries and territories and, for this purpose, to establish, operate, manage, lease, maintain and purchase telecommunication systems, including mobile, cellular and wired or wireless telecommunications systems, fiber optics, multichannel transmission distribution systems, satellite transmit and receive systems, and other telecommunications systems and their value-added services such as but not limited to transmission of voice, data, facsimile, control signals, audio and video, information service bureau and all other telecommunications systems technologies as are at present available or be made available through technical advances or innovations in the future, or construct, acquire, lease and operate or manage transmitting and receiving stations and switching stations, both for local and international services, lines, cables or systems, as is, or are, convenient or essential to efficiently carry out the purposes of this franchise . . ." (Republic Act No. 7082, Section 1) In the course of maintaining and operating the franchise given, PLDT purchases and imports various equipment, machineries and spare parts from abroad. In reply, please be informed that under Section 12 of Republic Act No. 7082, which provides as follows: "SEC. 12. 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 corporation 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 telephone or other telecommunications businesses 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 Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. . . ." PLDT 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 deposits 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 PLDT consummated on or after January 1, 1990 (RMC 7-90); 5. Capital gains tax (CGT) on capital gains realized from the 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. PLDT 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 12 of RA 7082 clearly exempts PLDT from all taxes including the 10% value-added tax (VAT) prescribed by Section 101 (a) of the same Code on its importations of equipment, machineries and spare parts necessary in the conduct of its business covered by the franchise, except the aforementioned enumerated taxes for which PLDT 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 name, nature or description, has 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 other 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 payment 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 or 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 government entities who have a right to collect taxes; 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 12 of RA 7082 for the taxes PLDT 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 PLDT shall not be subject. Otherwise, it would leave no exemption privilege at all to PLDT, 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 confirms your opinion, as it hereby holds that PLDT, is exempt from VAT on its importation of equipment, machineries and spare parts, including but not limited to cellular phones, needed in its franchise operations. (BIR Ruling No. UN-035-94, January 25, 1994) cdtech Very truly yours, JAIME M. MAZA Assistant Commissioner (Legal Service)