VAT Ruling No. 045-03

October 13, 2003 VAT RULING NO. 045-03 RA 7716 BIR Ruling No. 101-97 PNCC Skyway Corporation EDSA cor. Reliance St. Mandaluyong City Attention: Mr. Romerico O. Reganit General Manager Gentlemen : This refers to your letter dated February 3, 2003 requesting for exemption from the payment of VAT on the gross receipts derived by the PNCC Skyway Corporation (PSC) in the operation of the South Luzon Expressway Skyway System. It is represented that Philippine National Construction Corporation (PNCC) is a franchise grantee entitled to certain tax exemptions; that under VAT Ruling No. 854-89, PNCC has been declared VAT exempt by virtue of its franchise for its direct tax liability for the projects it directly undertakes in connection with its franchise; that likewise, under VAT Ruling No. 78-99 involving a Joint Venture between PNCC and the Manila North Tollways Corporation (MNTC) for the rehabilitation, modernization and expansion of the North Luzon Expressway (NLE), it was ruled that MNTC is exempt from VAT on its gross receipts from the management and operation of the North and South Expressways; that moreover, in VAT Ruling No. 121-99 issued to Citra Metro Manila Tollways Corporation (CMMTC), the joint venture partner of PNCC in the design, construction and financing of the Skyway System, it was ruled that the joint undertaking of PNCC and CITRA is exempt from VAT on all the revenue generated by the South Luzon Expressway Skyway System; that as a franchise grantee, PNCC has the right to transfer or assign its usufructuary rights, interest and privileges as provided for under Section 8 of PD 1113, as amended by Section 13 of PD 1894; that PNCC Skyway Corporation (PSC) is 100% subsidiary of PNCC; that under a Deed of Assignment between PNCC and PSC, PNCC assigned its rights and transfers its liabilities and obligations ordained under the Supplemental Toll Operations Agreement (STOA) provided that PNCC shall continue to be liable to the Republic of the Philippines and Citra Metro Manila for the due performance by PNCC Skyway Corporation of such obligations in accordance with Section 6.16(2) of the same STOA. In reply, please be informed that with the promulgation of R.A. 7716 restructuring the VAT system, services of all franchise grantees, EXCEPT radio and/or television broadcasting companies whose annual gross receipts of the preceding year does not exceed P10 Million, and electric, gas and water utilities, are already subject to VAT. In BIR Ruling No. 101-97 dated September 24, 1997, this Office opined, viz: "The mere inclusion of the services of all other franchise grantees, EXCEPT radio and/or television broadcasting companies whose annual gross receipts of the preceding your does not exceed P10 Million, and electric, gas and water utilities, among those services which are subject to VAT under Sec. 102(a) of the Tax Code, as amended by RA No. 7716, as further amended by RA No. 8241, contemplates that all services being rendered by any franchise grantee not falling under Sec. 117 of the Tax Code, regardless of any previous exemptions granted to it by any general or special law under its franchise, are now subject to VAT. "Sec. 102. Value-added tax on sale of services and use or lease of properties . "(a) Rate and base of tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. "The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including . . . SERVICES OF franchise grantees of telephone and telegraph, radio and television broadcasting and ALL OTHER FRANCHISE GRANTEES except those under Sec. 117 of this Code . . ." (Emphasis supplied) "Further, Section 117 (now Sec. 119) of the Tax Code, as amended by R.A. 8241, provides: ACDIcS "Sec. 117. Tax on franchises. Any provisions 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) , 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 taxpayer and pay the tax due thereon: Provided, further , That once the option is exercised, it shall not be revoked. "The grantee shall file the return with, and pay the tax due thereon to, the Commissioner of Internal Revenue or his duly authorized representative in accordance with the provisions of Sec. 125 of this Code and the return shall be subject to audit by the Bureau of Internal Revenue, any provision of any existing law to the contrary notwithstanding." "PAL and all other domestic common carriers by air, which include Cebu Air, belong to the category of "other franchise grantees" referred to under Sec. 102(a) (now Sec. 108(A), in relation to Sec. 117 (now Sec. 119), both of the Tax Code, as amended, meaning that they belong to the group of franchise grantees which are not subject to the franchise tax under Sec. 117 (now Sec. 119) of the Tax code, and therefore liable to VAT under Sec. 102(a) (now Sec. 108(A) of the same Code. Thus, all services by the said franchise grantees which are previously exempt under their respective Charters are now subject to VAT. "In BIR Ruling No. 27-97 dated March 31, 1997, the Commissioner held that due to the inclusion of franchise grantees in Sec. 102(a) (now Sec. 109(A) of the Tax Code, as amended by R.A. No. 7716, and as further amended by R.A. 8241, " effective January 1, 1996, PT & T (a franchise grantee not falling under Sec. 117 of the Tax Code) shall no longer be subject to the one and one-half percent (1%) franchise tax on its gross receipts from business covered by the law granting its franchise but to the 10% VAT prescribed under Sec. 102 (now Sec. 108) of the Tax Code, as amended ." "Similarly, effective January 1, 1996, Cebu Air, Inc., being a franchise grantee not falling under Sec. 117 (now Sec. 119) of the Tax Code, as amended, shall no longer be subject to the franchise tax on its gross receipts derived from its domestic transport of goods and cargoes covered by the law granting its franchise under RA 7151, but to the 10% VAT prescribed under Sec. 102(a) (now Sec. 108(A) of the Tax Code, as amended, as implemented by Sec. 4.103-1(B)(q)(4) of RR 7-95, as amended by Sec. 4 of RR 6-97. However, the gross receipts it derives from the transport of its passengers shall be subject to the common carrier's tax equivalent to 3% of its quarterly gross receipts pursuant to Sec. 115 of the Tax Code, as amended." The above-quoted ruling on "other franchise grantees" issued by this Office is still the existing ruling on VAT of other franchise grantees, which include, among others, PAGCOR. Similarly, this should be applied to PNCC and its contractees or joint venture partners. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group