BIR Ruling [UN-198-94]

July 6, 1994 BIR RULING [UN-198-94] Philippine Communications Satellite Corporation (PHILCOMSAT) Telecoms Plaza Building 316 Sen. Gil Puyat Avenue Makati, Metro Manila Attention: Mr . Alfredo L . Africa Senior Vice President Gentlemen : This refers to your request for confirmation of your opinion that the 3% franchise tax payable by you shall be based on gross receipts or the amounts actually collected. It appears that PHILCOMSAT is a grantee of a legislative franchise under Republic Act No. 5514 effective June 21, 1969; that under Section 8 of said franchise, the grantee shall pay the franchise tax on gross receipts derived from its satellite transmissions business; that pursuant to Executive Order No. 72 amending Section 117 of the Tax Code, it is now subject to the 3% franchise tax on the said gross receipts (BIR Ruling No. 261-91); that under Section 125 of the Tax Code, as amended, PHILCOMSAT is required to file a quarterly return of its gross receipts and pay the franchise tax thereon within twenty (20) days after the end of each taxable quarter; that PHILCOMSAT declares in its quarterly returns the amounts billed to its carriers, which does not necessarily represent the amounts actually collected; that said amounts billed include those that have remained uncollected as of the end of the taxable quarter. In reply, please be informed that your opinion is hereby confirmed. The term "gross receipts" subject to franchise tax includes only the amounts actually collected by PHILCOMSAT from its carriers. Amounts that have not been collected, although billed during a quarter shall not form part of the gross receipts subject to franchise tax for said quarter. (PLDT Co. vs. Collector of Internal Revenue, 90 Phil 676). Moreover, under BIR Ruling No. 65-123 dated November 12, 1965, this Office ruled "that the 3% tax prescribed in Section 191 of the Tax Code is based on the actual receipts of the contractor. Accordingly, accounts which remained uncollected at the end of the month should not be declared for taxation during the month for purposes of the percentage tax. However, the said amounts should be returned for taxation and the tax due thereon paid during the month in which they are collected. In this connection, with the advent of the Expanded VAT Law (R.A. No. 7716) which took effect on May 28, 1994, services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except electric, gas and water utilities shall be subject to Value Added Tax (VAT). However, they are no longer subject to the franchise tax on their gross receipts derived from their franchised operations under their respective charters or Section 117 of the Tax Code. The term "gross receipts" refers to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with its services and deposits and advance payments actually or constructively received during the month/taxable quarter for services performed or to be performed for another person excluding the VAT. Such being the case, PHILCOMSAT shall be subject to 10% VAT on actual gross receipts from its satellite telecommunications services instead of the 3% franchise tax imposed under Section 117(b) of the Tax Code. The payment of 10% VAT on gross receipts shall still be in lieu of all other taxes, as provided for in Section 8 of its franchise charter (R.A. 5514). The "in lieu of all taxes" provision in the franchise of PHILCOMSAT has not been affected by the new VAT Law, inasmuch as what was specifically amended is only the kind and rate of tax to be imposed on the gross receipts from telecommunications services. In the case of 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, 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 percentage exemption from all other taxes. (BIR Ruling U.N.-075-94, February 28, 1994). Very truly yours, ALICIA P. CLEMENO Acting Assistant Commissioner Legal Service