Clarification of Issues Affecting Franchise Grantee under Section 117 of the Tax Code, as Amended, under R.A. No. 7716, Otherwise Known as the "Expanded VAT Law"

January 15, 1996 REVENUE MEMORANDUM CIRCULAR NO. 05-96 SUBJECT : Clarification of Issues Affecting Franchise Grantee under Section 117 of the Tax Code, as Amended, under R.A. No. 7716, Otherwise Known as the "Expanded VAT Law" TO : All Internal Revenue Officers and Others Concerned Q-1 What are the franchise grantees subject to VAT beginning January 1, 1996? A-1 a. Telephone and telegraph companies; b. Radio and television broadcasting; and c. Other franchise grantees which are not include in No. 2 hereunder. Q-2 What franchise grantees are not subject to VAT but to the two percent (2%) tax under Section 117 of the Tax Code? A-2 a. Electric franchise grantees; b. Gas franchise grantees; and c. Water utilities. Q-3 Now that franchise grantees are already subject to VAT, will they still be subject to the franchise tax? A-3 Franchise grantees now subject to VAT are no longer subject to the franchise tax. Q-4 What happens to the "in lieu of all taxes" provision in the character of a franchise grantee now covered by VAT? A-4: The "in lieu of all taxes" provision in the franchise is not affected by the Expanded VAT Law. VAT merely replaced the franchise tax. In other words, VAT instead of franchise tax shall be in lieu of all taxes due from a franchise grantee. Q-5 What is the basis in computing VAT payable on transaction of telecommunications companies? A-5 The basis for computing VAT payable on transactions of telecommunications companies shall be the gross receipts. Q-6 What is gross receipts for purposes of franchise grantees subject to VAT? A-6 For purposes of franchise grantees subject to VAT, gross receipts, as defined under Revenue Regulations No. 7-95, refer 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 the services and deposits and advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding VAT. However, said gross receipts subject to VAT shall not include amounts earmarked for payment to another telecommunications company; foreign administration's (FA's) share for the services performed outside the Philippines; and amounts received from overseas dispatch, message or conversation originating from the Philippines which is covered by Section 118, Title V of the Tax Code. Q-7 What portion of their gross receipts is not subject to VAT? A-7 a. The share of the foreign telecommunications administration (FA) in the payment received by a local telecommunications company from its customers in accordance with their agreement is not subject to VAT because the related services are performed by FA outside the Philippines. The telecommunications company shall not charge VAT on the FA's share. In billing customers, the local telecommunications company shall present the FA's share separately with a notation that it is VAT exempt. The FA's share may be presented on the same VAT invoice or official receipt showing the telecommunications company's other VAT taxable charges. b. Deposit for telephone instruments and the like are not subject to VAT. However, if the said deposits for telephone instruments and the like are forfeited, the telecommunications company shall be subject to VAT thereon. Q-8 What is the basis of the presumptive input tax of franchise grantees subject to VAT? A-8 The presumptive input tax credit of franchise grantees subject to VAT shall be based on the value of the inventories of goods, supplies, materials and spare parts purchased for use in business as of December 31, 1995. Q-9 What are the requirements to be submitted by the franchise grantees on or before January 31, 1996 to the RDO where the registration was made? Q-9 a. Inventory of supplies, materials and goods purchased for use in business on hand as of December 31, 1995 for purposes of the presumptive input tax credits; and b. Inventory of unused invoices as of December 31, 1995. All revenue officials and employees are hereby enjoined to give this Circular the widest publicity possible. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue