Proposed Local Finance Circular

January 14, 2011 BLGF MEMORANDUM FOR : Secretary Cesar V. Purisima Department of Finance THRU : Undersecretary Gil S. Beltran Department of Finance SUBJECT : Proposed Local Finance Circular This refers to the undated letter of Mr. EDGAR T. VILLANUEVA, OIC-City Treasurer, relative to the 2nd Indorsement dated 05 August 2010 of Hon. HERBERT M. BAUTISTA, City Mayor of Quezon City, letter dated September 2, 2010 of Mayor OSCAR S. RODRIGUEZ, National President, League of Cities in the Philippines (LCP), both indorsing the proposed Guidelines on the imposition of taxes, fees and charges on franchise grantees/holders of Telecommunications, Radio and Television Broadcasting Networks and other similarly situated businesses, and letter dated 28 October 2010 of Atty. RODOLFO A. SALALIMA, President of the Philippine Chamber of Telecommunications Operators (PCTO), submitting their position papers regarding the proposed Local Finance Circular entitled "Guidelines on the Imposition of Taxes, Fees and Charges on Franchise Grantees of Telecommunications, Radio and Television Broadcasting Networks and Other Similarly Situated Business Entities." The above indorsements are in connection with the Supreme Court Decision, concerning the taxability of franchise holders/grantees, in the case of Quezon City and The City Treasurer of Quezon City vs. ABS-CBN Broadcasting Corporation, G.R. No. 166408 and G.R. No. 155491, promulgated on October 6, 2008 and July 21, 2009, respectively, the pertinent portions of which are quoted as follows: "Subsequently, R.A. No. 8241 [37] took effect on January 1, 1997 [38] containing more amendments to the NIRC. Radio and/or television companies whose annual gross receipts do not exceed P10,000,000.00 were granted the option to choose between paying 3% national franchise tax or 10% VAT. Section 9 of R.A. No. 8241 provides: SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read as follows: Sec. 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows: Sec. 117. Tax on franchise. 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 (P10,000,000.00), subject to Section 107(d) 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 tax payer and pay the tax due thereon: Provided, further, That once the option is exercised, it shall not be revoked. (Emphasis supplied) On the other hand, radio and/or television companies with yearly gross receipts exceeding P10,000,000.00 were subject to 10% VAT, pursuant to Section 102 of the NIRC. The franchise tax, on the other hand, is a percentage tax imposed only on franchise holders. It is imposed under Section 119 of the Tax Code and is a direct liability of the franchise grantee. ACaEcH The clause in lieu of all taxes does not pertain to VAT or any other tax. It cannot apply when what is paid is a tax other than a franchise tax. Since the franchise tax on the broadcasting companies with yearly gross receipts exceeding ten million pesos has been abolished, the in lieu of all taxes clause has now become functus officio, rendered inoperative . (Emphasis supplied) In sum, ABS-CBNs claims for exemption must fail on twin grounds. First, the in lieu of all taxes clause in its franchise failed to specify the taxes the company is sought to be exempted from. Neither did it particularize the jurisdiction from which the taxing power is withheld. Second, the clause has become functus officio because as the law now stands, ABS-CBN is no longer subject to a franchise tax. It is now liable for VAT. WHEREFORE, the petition is GRANTED and the appealed Decision REVERSED AND SET ASIDE. The petition in the trial court for refund of local franchise tax is DISMISSED." Relative thereto, the Court had previously rendered the following Decisions: 1) SMART COMMUNICATIONS, INC. vs. THE CITY OF DAVAO, et al., G.R. No. 155491, dated September 16, 2008 "It should be noted that the "in lieu of all taxes" clause in R.A. No. 7294 has become functus officio with the abolition of the franchise tax on telecommunications companies. As admitted by Smart in its pleadings, it is no longer paying the 3% franchise tax mandated in its franchise. Currently, Smart along with other telecommunications companies pays the uniform 10% value-added tax. R.A. No. 7716, specifically Section 20 thereof, expressly repealed the provisions of all special laws relative to the rate of franchise taxes. It also repealed, amended, or modified all other laws, orders, issuances, rules and regulations, or parts thereof which are inconsistent with it. In effect, the "in lieu of all taxes" clause in R.A. No. 7294 was rendered ineffective by the advent of the VAT Law." 2) Digital Telecommunications Phil., Inc. vs. Province of Pangasinan, G.R. No. 152534, February 23, 2007 "The foregoing pronouncement notwithstanding, in view of the passage of Republic Act No. 7716, 22 abolishing the franchise tax imposed on telecommunications companies effective 1 January 1996 and in its place is imposed a 10 percent Value-Added-Tax (VAT), 23 the "in-lieu-of-all-taxes" clause/provision in the legislative franchises of Globe, Smart and Bell, among others, has now become functus officio, made inoperative for lack of a franchise tax. Therefore, taking into consideration the above, from 1 January 1996, petitioner DIGITEL ceased to be liable for national franchise tax and in its stead is imposed a 10% VAT in accordance with Section 108 of the Tax Code . xxx xxx xxx "In denying PLDT's petition, this Court, speaking through Mr. Justice Vicente V. Mendoza, held that in approving Section 23 of Republic Act No. 7925, Congress did not intend it to operate as a blanket tax exemption to all telecommunications entities; thus, it cannot be considered as having amended petitioner PLDT's franchise so as to entitle it to exemption from the imposition of local franchise taxes. The ponencia went on further to elucidate that: "To begin with, tax exemptions are highly disfavored. . . . "The tax exemption must be expressed in the statute in clear language that leaves no doubt of the intention of the legislature to grant such exemption. And, even if it is granted, the exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. (Citation omitted)" The advent of the LGC in January 1, 1992 has given a new and wider dimension to the taxing authority of LGUs with emphasis on the development of local tax base aimed at expanding the basis of locally-sourced revenues. The LGC has, to some extent, given these LGUs more autonomy in handling their own affairs at the local levels. However, local autonomy is not without limitations such that LGUs' taxing powers are at times contained in subsequent legislative enactments giving entities tax incentives and other tax reliefs or exemptions. DacTEH These fiscal incentives in the form of tax exemptions are the most common elements of legislative franchises, especially among public utilities and telecommunications, including radio and television networks. These entities shall hereinafter be collectively referred to as franchise holders/grantees. A survey of the various franchises of telecommunications and other entities having similar business operations shows that in almost all cases, these legislative franchises or charters have the "in lieu of all taxes" clause/proviso, which in most cases was generally interpreted as giving exemptions from both national and local tax liability to these franchise holders/grantees. Quoted below are some of the legislative charters/franchises of telecommunication and media networks, viz. : 1) GMA Network, Inc.: R.A. No. 7252, March 20, 1992 "SECTION 8. 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 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 radio/television 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. . . ." 2) SMART TELECOM: RA No. 7294 March 27, 1992 "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 hereto, 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 enacted is amended or repealed, in which case the amendment or repeal shall be applicable thereto. . . . ." (Emphasis supplied) 3) GLOBE TELECOM: RA 4540 (Amending RA No. 7279, approving the merger of Globe Mackay and Radio Corp. and Clavecilla Radio System on March 19, 1992) "Sec. 9(a) The grantee shall be liable to pay the same taxes on its real estate, buildings, and personal property, exclusive of this franchise , as other persons or corporations are now or hereafter may be required by law to pay, except radio equipment, machinery and spare parts needed in connection with the business of the grantee, which shall be exempt from customs duties, tariffs and other taxes, as well as those declared exempt in this section. (b) The grantee shall further pay to the Treasurer of the Philippines each year after the audit and approval on the accounts as prescribed in this Act, one and half percentum of all gross receipts from business transacted under this franchise by the said grantee in the Philippines, in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authority whatsoever, municipal, provincial or national from which the grantee is hereby expressly exempted, . . . ." (Emphasis supplied) Section 20. This franchise shall not be interpreted to mean an exclusive grant of the privileges herein provided for, however, in the event of any competing individual, partnership, or corporation, receiving from the Congress of the Philippines a similar permit or franchise more favorable than those herein granted or tending to place the herein grantee at any disadvantage, then such term, or terms, shall, ipso facto become part of the terms hereof, and shall operate equally in favor of the grantee as in the case of said competing individual, partnership or corporation. (Emphasis supplied) 4) DIGITEL MOBILE Franchise: RA No. 9180 December 11, 2002 IASTDE "SECTION 12. Tax Provisions. The grantee, its successors or assigns, shall be subject to the payment of all taxes, duties, fees or charges and other impositions under the National Internal Revenue Code of 1997, as amended, and other applicable laws: Provided, That nothing herein shall be construed as repealing any specific tax exemptions, incentives, or privileges granted under any relevant law: Provided, further, That all rights, privileges, benefits and exemptions accorded to existing and future telecommunications franchises shall likewise be extended to the grantee. . . . ." (Emphasis supplied) 5) BAYANTEL Franchise: RA No. 7633 July 20, 1992 (Amending Bayantel's original franchise) "SEC. 11. 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 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 . . . ." (Emphasis supplied) 6) DIGITAL TELECOMS: RA No. 7678 February 17, 1994 "Sec. 5. Tax Provisions. The grantee shall be liable to pay the same taxes on its real estate, buildings, and personal property exclusive of this franchise as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto the grantee shall pay to the Bureau of Internal Revenue each year, within thirty (30) days after the audit and approval of the accounts, a franchise tax as may be prescribed by law of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee: Provided, That the grantee 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 or repeal shall be applicable thereto." 7) PLDT: RA No. 7082 August 3, 1991 "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 corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successor 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 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto." (Emphasis supplied) This recent development relative to said SC Decision declaring ABS-CBN's "in lieu of taxes" clauses/provisos on its legislative franchise (R.A. No. 7966) functus officio , paved the way for local government units (LGUs) concerned to request for guidelines for the proper imposition of taxes, fees and charges on franchise holders/grantees. LGUs' authority to impose franchise tax on the aforementioned business entities is provided for under the following provisions of the LGC, quoted as follows: 1) For provinces: Article 226 of the Implementing Rules and Regulations implementing Section 137 of the LGC, which provides: "Article 226. Franchise Tax. (a) Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts, which shall include both cash sales and sales on account realized during the preceding calendar year within its territorial jurisdiction, excluding the territorial limits of any city located in the province. (b) The province, however, shall not impose the tax on businesses enjoying franchise operating within the territorial jurisdiction of any highly-urbanized or component city located within the province. aCHDST (c) The term businesses enjoying franchise shall not include holders of certificates of public convenience for the operation of public utility vehicles for reason that such certificates are not considered as franchise. (d) In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein." The capital investment to be used as basis of the tax of a newly started business as herein provided shall be determined in the following manner: (1) In the locality where the principal office of the business is located, the paid-up capital stated in the articles of incorporation, in case of corporations, or in any similar document in case of other types of business organizations or enterprises, shall be considered as the capital investment. (2) Where there is a branch or sales office which commences business operations during the same year as the principal office but which is located in another province or in a city outside the province, the paid-up capital referred to above shall be reduced by the amount of the capital investment made for the said branch or sales office which shall be taxable instead by the province or city where it is located. (3) Where the newly-started business is a branch or sales office commencing business operations at a year later than that of the principal office, capital investment shall mean the total funds invested in the branch or sales office." 2) For cities: Section 151 of the LGC is quoted below, in relation to the abovequoted Section 137, which provides: "SEC. 151. Scope of Taxing Powers. Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code. The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes." To properly address this urgent concern of LGUs, attached for your approval is the proposed Local Finance Circular, wherein clarifications have been made on the following: 1) The imposition of franchise tax by local government units (LGUs) shall be based on the gross annual sales or receipts of the preceding calendar year. 2) In case of business tax, the imposition and collection thereof from franchise holders/grantee shall be in accordance with Section 143 (e) of the LGC. 3) In case of a newly started business, the imposition of franchise tax shall be in accordance with Section 137 of the LGC, supra . However, with regard to business tax, no initial business tax may be imposed on a newly-started business except regulatory fees and charges, and in no case shall the imposition thereof be based on capital investment or gross sales or receipt of the business liable therefor. (Art. 233, IRR of the LGC) Attached is the proposed Local Finance Circular for your approval. Thank you. ADHcTE (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director