Basic Holdings Corporation

March 15, 2007 VAT RULING NO. 003-07 Sec. 110A 000-00 Basic Holdings Corporation Fortune Ave., Barangay Fortune Marikina City Attention: Ms. Juanita Tan Lee Corporate Secretary M a d a m : This refers to your letter dated January 5, 2007 wherein you requested a confirmation of your opinion that the input taxes on the importation and local purchase of parts and spare parts for the construction and maintenance of your telecommunication network is not subject to amortization provided for under Section 110 of the Tax Code. It is represented that your company, Basic Holdings Corporation, is putting up a telecommunication network (referred to as "The Project") to be used by the Lucio Tan Group of Companies. The Project is a digital telephone interconnection between and among the different companies comprising the Group. The Project will ultimately be booked as part of Plant, Property and Equipment upon its completion. The parts of the Project are sourced from outside and within the Philippines. The purchase and shipment is on a staggered basis which started last December of 2004. Spare parts are also imported, along with the other bulk of importation, for maintenance purposes. In furtherance of the Project, you engaged the services of a local contractor to assemble all these parts to form the depreciable asset, the completed telecommunication network. The Project is comprised of different phases and the Phase 1 thereof started in December 2004. Currently, the company is done with Phase 3 of the Project, and possible additional phases may be constructed depending on the needs of the companies under the Group. In reply thereto, please be informed that the spreading and/or amortization of the input tax is required only if the purchased or imported goods to be used in business are subject to depreciation in their present state. Section 110 (A) of the National Internal Revenue Code, as amended by R.A. No. 9337, in pertinent part provides as follows: " Provided , That the input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos (P1,000,000): Provided, however , That if the estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period:" ( Emphasis supplied ). By logical implication, if the goods purchased or imported are not per se depreciable, but will only be used as materials in the construction or assembly of a depreciable asset, the input tax on the said goods is not required to be spread over the period prescribed in the aforesaid Section. In fine, there must be concurrence of the following requirements in order that the input tax will be spread or amortized, viz: (1) input tax is paid on the purchase or importation of goods; (2) the goods are subject to depreciation; and (3) the aggregate acquisition cost (excluding the VAT) for the month exceeds One Million Pesos (P1,000,000.00). The requirement, that the goods acquired must be depreciable at the time of their acquisition, was made even more manifest under the implementing Regulations (RR No. 16-2005) when in Section 4.110-3, it was emphasized that to be covered by the rule on amortization " a VAT-registered person purchases or imports capital goods, which are depreciable assets for income tax purposes . . .". Also, in the same Section it was said that " Where the aggregate acquisition cost (exclusive of VAT) of the existing or finished depreciable capital goods purchased or imported during any calendar month does not exceed One Million Pesos (P1,000,000.00), the total input taxes will be allowable as credit against output tax in the month of acquisition ;". This means that all of these provisions taken singly and collectively would lead to the inescapable conclusion that the goods purchased or imported refers to an existing or finished depreciable asset at the time of acquisition. Accordingly, we rule that the input taxes paid on your importation and local purchase of parts which are not existing or finished depreciable assets to be assembled into a depreciable asset or equipment and on spare parts which are likewise not existing or finished depreciable assets for the maintenance of the Project, are not subject to amortization, but may be claimed as credit against the output tax in the month of acquisition regardless of whether or not the aggregate acquisition cost in a calendar month exceeds One Million Pesos (P1,000,000.00), exclusive of the VAT. DaScAI This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be disclosed that the facts are different, then, this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue