Citra Metro Tollways Corporation (CITRA)

February 11, 2002 VAT RULING NO. 004-02 Sec. 109 VAT Ruling 121-99 SGV & Company 6760 Ayala Avenue 1226 Makati City Attention: Mr. R.R. Rubio Tax Division SUBJECT : Citra Metro Tollways Corporation (CITRA) Gentlemen : This refers to your letter, dated October 9, 2001, concerning your request for a confirmation of your opinion that CITRA's gross receipts from the lease of its "E-PASS TAGS" (TAGS) to motorists using the South Luzon Toll Expressway and Skyway are exempt from the value added tax (VAT). It is represented that CITRA is the concessionaire of the Philippine National Construction Corporation (PNCC) operating the toll facilities in the South Luzon Toll Expressway and Skyway; that, CITRA is presently using the "Electronic Toll Collection (ETC) System" in its Metro Manila Skyway Project" (Skyway System); that, under this System, the TAG is placed in the inside surface of the motorist's motor vehicle; that, upon entry at the designated lanes in the E-Pass-Ready toll plazas, the TAG will be electronically read by a special reading device. The device determines and keeps a record of the motorist's entry and, upon his exit, also determines the toll fee to be paid; that, the E-Pass comes with a pre-paid toll fee upon which the toll shall be automatically deducted; that, the motorists can replenish this by purchasing E-Pass Value Cards or automatically through credit card charging. Because the toll is prepaid, the System will provide motorists the convenience of a contactless and cashless toll transaction and less time queuing at the toll plazas; that, motorists who would like to avail of the ETC System will need to secure an E-Pass Service Application. Afterwards, the motorists are given an E-Pass Kit which contains the TAG; that, without including the cost of the initial pre-paid toll of P500.00, the TAG can be secured from CITRA at P2,000.00 to cover a five-year renewable lease period for the use of the TAG; that, this is covered by an E-Pass User's Agreement; that, in some instances, the cost of the lease is shouldered or sponsored by third parties, such as gasoline and car insurance companies, for distribution to their own customers or prospective clients as promotional items. However, the lease agreement remains as between CITRA and the motorist (the USER); that, pursuant to the USER's Agreement, ownership remains with CITRA for the duration of the Agreement. In case of termination or non-renewal, the USER is obliged to return the TAG to CITRA, which in turn will refund the USER for any unexpired amount of the P2,000.00; that, the USER is responsible for keeping the TAG in good order and condition, fair wear and tear excepted; that, the USER shall be responsible for the repair and replacement cost in case of damage to the TAG; that, in case of loss of the TAG, the USER may request for a new one by paying CITRA P2,000.00 under a new agreement. That, in VAT RULING No. 121-99 dated December 23, 1999, it has been established that CITRA is exempt from the VAT, pursuant to Section 109 (q), NIRC of 1997, in relation to PNCC's legislative franchise under Presidential Decree No. 1113, as amended by Presidential Decree No. 1894. In reply, please be informed that, in the VAT RULING No. 121-99, it has been established that, pursuant to its legislative franchise, the PNCC is exempt from all national internal revenue taxes, except from the payment of income tax, and that, as PNCC's Concessionaire, CITRA is likewise exempt from the said taxes, as follows: ". . . the right of PNCC, as the original franchise grantee, to lease, transfer, or assign its usufructuary rights, interest and privileges under its franchise is provided for under Section 8 of P.D. 1113, as amended by its reproduction in Section 13 of P.D. 1894, as follows: ` Section 8 . The Grantee shall not lease, transfer, grant the usufruct of, sell or assign this franchise nor the rights or privileges required hereby, to any person, firm, company; corporation or other legal entity, nor merge with any other company or corporation without the prior approval of the President of the Philippines. In the event that this franchise is sold, transferred or assigned, the transferee shall be subject to all the conditions, terms, restrictions and limitations of this Decree as fully and completely and to the same extent as if the franchise has been granted to the said person, firm, company, corporation or other legal entity .' (Emphasis supplied). "The prior approval of the President of the Philippines has been obtained pertaining to the assignment of PNCC's rights, interest and privileges as per signed copy of the Supplemental Toll Operation Agreement dated November 27, 1995 among the Toll Regulatory Board, Philippine National Construction Corporation and Citra Metro Manila Tollways Corporation. "Under the law, PNCC, as the franchise grantee, is entitled to certain tax exemption. Thus Section 14 of P.D. 1894, amending Section 10 of P.D. 1113 provides as follows: ' Section 14 . The provisions of existing laws to the contrary notwithstanding, no tax, charges or fees of any kind, nature or description now or in the future imposed or levied by any municipal, city, provincial or national authority shall be imposed , levied or assessed on or be collected from the GRANTEE in connection with its exercise of the right and privilege under this franchise and/or in connection with its activities pursued in accordance with and pursuant to this Decree, other than taxes on its income and real property in conformity with existing laws.' xxx xxx xxx "Based on the foregoing, we hereby confirm that under the above-narrated set of facts, CITRA is likewise entitled to the same tax exemption privileges of PNCC by virtue of the Business and Joint Venture Agreement between the parties . It is already settled that the state, through PNCC as in this case, may enter into a binding contract with a person or corporation which contract can be enforced against it. Likewise, it is settled by repeated adjudications of the Court that a State may by contract based on a consideration exempt the property of an individual or corporation from taxation and that the exemption is presumed to be on sufficient consideration and binds the State if the charter containing it is accepted. (Casanovas vs. Hord, 8 Phil. 125). "Hence, the joint undertaking of PNCC and CITRA is exempt from VAT on the toll revenues generated by the South Luzon Expressway the Skyway. This is so, because the said joint undertaking has been subrogated to all the rights and privileges including the tax exemption privilege by virtue of the franchise granted to PNCC as well as under the Supplemental Toll Operations Agreement (STOA). It bears stressing that PNCC remains as the operator of the South Luzon Toll Expressway and the Skyway and sound public policy dictates that the toll fees be freed from the added burden of taxation in order to spare the public from ultimately shouldering the tax. This is further confirmed by Sec. 109 (q) of the Tax Code of 1997 which exempts from VAT transactions given exemption under special laws. However, since the said exemption is limited only to taxes for which PNCC is directly liable as a vendor/seller, the joint undertaking between PNCC and CITRA is not exempt from the VAT passed on to it for its purchases of goods and services. Furthermore, projects by CITRA other than those projects covered by STOA shall be subject to VAT pursuant to Sec. 108(A) of the same Code. (VAT Ruling No. 254-89 dated Oct. 9, 1989; VAT Ruling No. 078-99 dated August 9, 1999)." THEDCA CITRA's aforementioned "E-PASS TAGS," leased to motorists using the South Luzon Toll Expressway and the Skyway, is only an electronic means of collecting tolls from the said motoring public, hence, embraced by the tax exemption (except from income tax) granted under Section 14 of PNCC's legislative franchise, which has been legally extended to CITRA by virtue of the aforementioned PNCC-CITRA Agreement, in relation to Section 8 of the said franchise. Accordingly, CITRA's gross receipts from lease of the said "E-PASS TAGS" to the aforesaid motorists are exempt from the 10% VAT, pursuant to Section 109 (q), NIRC of 1997, in relation to the aforesaid legislative franchise of the PNCC. This ruling is issued on the basis of the foregoing facts as represented. If after investigation, it is determined that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group