D R A F T (Send Comments to [email protected])

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1 Republic of the Philippines Department of Finance Bureau of Internal Revenue Quezon City D R A F T (Send Comments to [email protected]) Aug. 16, 2004 REVENUE REGULATIONS NO. SUBJECT : Taxation of Telecommunications Transactions TO : All Internal Revenue Officers and Others Concerned. Section 1. Scope. - Pursuant to the provisions of Section 244 of the National Internal Revenue Code of 1997 (Tax Code), these Regulations are hereby promulgated to clearly define the applicable taxes on various transactions of all duly authorized public telecommunications companies and to establish practical mechanisms for their effective collection. Section 2. Definition Of Terms. - For purposes of these Regulations, the terms hereunder enumerated shall have the following meaning: a) Authorized Public Telecommunications Company refers to a franchised public telecommunications entity duly authorized by the National Telecommunications Commission; b) Cellular Mobile Telephone System (CMTS) a wide area mobile radio telephone system with its own switch, base stations and transmission facilities capable of providing high capacity mobile telecommunications by utilizing radio frequencies; c) Circuit Rentals Remuneration paid for a fully operative communications path used for message, access or private line service; d) Customer Premises Equipment items of telecommunications terminal equipment such as telephone instruments, private branch exchange (PBX), dialers, data sets, and other supplemental equipment dedicated to a particular end user and located on customer premises; e) Domestic Leased Lines a private leased service that provides dedicated connection between private networks within the Philippines; f) Foreign Administration (FA) a foreign telecommunications company; Page 1 of 14

2 g) Franchise a privilege conferred upon a telecommunications entity by Congress, authorizing that entity to engage in a certain type of telecommunications service; h) Incoming Collect Calls telephone calls originating from a subscriber or customer of a foreign administration and terminating to and paid by a subscriber or customer of the terminating public telecommunications entity; i) Incoming Paid Calls telephone calls originating from a subscriber or customer of a foreign administration and paid to that entity; j) Interconnection the linkage by wire, radio, satellite or other means, of two or more existing public telecommunications entities with one another for the purpose of allowing or enabling the subscribers or customers of one public telecommunications entity to access or reach the subscribers or customers of another public telecommunications entity; k) International Gateway Facility (IGF) a facility consisting of international transmission, switching and network management facilities that serve as point of entry and exit in the Philippines of international traffic between a PTE s network and point/s outside the Philippines; l) International Leased Lines a line dedicated to a specific customer in order to establish a high-speed point-to-point communication channel between the Philippines and other countries; m) International Toll Calls calls that are: (1) originating from one local calling (service) area and terminating to a foreign calling (service) area; or (2) originating from a foreign administration and terminating in a local public telecommunications entity, or vice-versa; n) Local Calls Calls originating and terminating from one and the same public telecommunications entity, or two separate public telecommunications entities within the same local calling area; o) NTC National Telecommunications Commission; p) National Toll Calls calls originating and terminating within the Philippines other than a local call; q) Outgoing Collect Calls telephone calls emanating from a subscriber or customer of the originating public telecommunications entity and paid by the subscriber or customer of the terminating foreign administration; Page 2 of 14

3 r) Outgoing Paid Calls telephone calls emanating from and paid by the subscriber or customer of the originating public telecommunications entity; s) Prepaid Card refers to a card that has on its face, a value or denomination, the payment for which is in the nature of advance payment for the privilege to use the services offered by the telecommunications company. The card has an expiry date such that the value of the unused portion after expiry date is waived in favor of the issuing telecommunications company; t) Public Telecommunications Entity (PTE) any person, firm, partnership or corporation, government or private, engaged in the provision of telecommunications services to the public for compensation. A local PTE is a PTE organized and existing under Philippine laws; u) Revenue Sharing remuneration agreement pertaining to interconnection whereby the originating or transmitting carrier and the terminating carrier share the revenues paid by the customer on the basis of either a pre-agreed percentage or fixed amount per minute, also called Access Charge; v) Roaming the use of a wireless phone outside of the home service area defined by the service provider; w) Satellite a radio relay station that orbits the earth. A complete satellite communication system also includes earth stations that communicate with each other via the satellite. The satellite receives a signal transmitted by an originating earth station and retransmits that signal to the destination earth station(s); x) Subscriber Identity Module (SIM) refers to a card which contains a unique number identifying a particular subscriber, authorizing or enabling the same to have access to the services provided by the telecommunications company; y) Telecommunications any process which enables a telecommunication entity to relay and receive voice, data, electronic messages, written or printed matter, fixed or moving pictures, words, music or visible or audible signals or any control signals of any design and for any purpose by wire, radio or other electromagnetic, spectral, optical or technological means; and z) Value-Added Service refers to a service which adds a feature or value to basic telephone service not ordinarily provided by a public telecommunications entity such as format, media, conversion, Page 3 of 14

4 encryption, enhanced security features, paging, internet protocol, computer processing and the like. Section 3. Telecommunications Services. - An authorized public telecommunications company renders telecommunications services in accordance with its franchise. Its services are available to its subscribers (or customers) and other public telecommunications companies. Where the service is provided to a subscriber, it is generally achieved either through wire line, when telecommunications is carried through physical links such as telephone wires or cables, or wireless, when the same is coursed through non-physical links such as radio or infrared. Payments for these services come in the form of fixed subscription fees and variable charges, usually based on the number or fraction of minutes consumed priced at pre-determined rates. The provision of telecommunications services to subscribers results in derivative services such as the sale of handsets or customer premises equipment or provision of value-added services. Services to other public telecommunications companies include circuit rentals or the provision of bandwidth capacity, among others. Section 4. Income Tax Types of Revenue. Authorized public telecommunications companies derive revenues from the provision of telecommunications services and engaging in various activities related thereto. The following, although not exhaustive, typically constitute sources of income by a public telecommunications company: a) Voice services - local calls, national and international toll calls; b) Circuit rentals and leased lines (domestic and international); c) Interconnection settlements; d) Sale of telecommunications equipments such as phone instruments or handsets; e) Sale of prepaid cards; f) Value-added services (e.g., roaming charges, internet, etc.); g) Provision of satellite services; h) Telephone directory related income; and i) Other data services such as short messaging service and multimedia messaging services. 4.2 Revenue Characterization A public telecommunications company s revenues are generally characterized into (1) sale of goods; and (2) sale of services. Listed below are the types of revenue based on these classifications: Page 4 of 14

5 4.2.1 Sale of goods sale of handsets including accessories; and Sale of services provision of telecommunications services to subscribers and customers, and other public telecommunications companies. This includes voice and data services, telephone directory related income, leased lines, value added services, and the like. 4.3 Reporting of Interconnection Revenue. Interconnection agreements between telecommunications companies result in a telecommunications company collecting from the customer the gross amount which includes the estimated share of both or either a local public telecommunications company or foreign administration. This estimated share of the other telephone company for the interconnection, though originally forms part of reported gross revenue of the originating collecting telecommunications company, shall, at the same time, be reflected as interconnection fee expense at the point of setting up the liability to the other telephone company in the year the services were provided. Likewise, the other telecommunications company shall book and report as taxable income its estimated income share in the service fees or estimated interconnection income during the year of interconnection. The difference between the estimated and the actual share of the other telecommunications company shall be added to or deducted from gross income in the taxable year when interconnection accounts are settled. 4.4 Nature of Leased Telecommunications Facilities. Domestic and international leased lines, circuit rentals, satellite transponders, transmission facilities and CPEs are means to provide the customer access to telecommunications services. Such arrangements do not involve equipment being placed under the control of the service recipient, nor does the recipient have any significant economic or possessory interest in the equipment. If the equipment does not perform, it is the provider that bears the risk of substantially diminished receipts or substantially increased expenditures to remedy the problem. 4.5 Determination of Gross Income for Minimum Corporate Income Tax (MCIT) Purposes Variation in Existing MCIT Rules. Revenue Regulations No (RR 9-98) and Revenue Memorandum Circular No (RMC ) set out general rules on the determination of MCIT of domestic corporations and resident foreign corporations. Recognizing the peculiarities of the telecommunications industry, however, there is a need to define more clearly the items of income and expense that should be considered for these purposes. The following amendments are incorporated by reference to RR 9-98 and RMC to achieve this objective Scope of Gross Income, Cost of Goods Sold and Cost of Services. Public telecommunications entities engaged in both sale of goods and Page 5 of 14

6 sale of services will have a combined basis for MCIT. For this purpose, the following definitions shall apply: Gross income shall mean gross sales and/or receipts less sales returns, allowances, discounts and cost of goods sold and/or services rendered. Passive income which has been subjected to a final tax at source shall not form part of gross income for purposes of the MCIT. Gross sales shall include only sales contributory to income taxable under Section 27 (A) of the Tax Code, while Gross receipts shall mean actual or constructive receipts derived from rendering telecommunications services to subscribers and other telecommunications companies. Cost of goods sold shall include all business expenses directly incurred to produce and/or buy the merchandise and to bring them to their present location and use prior to sale, while Cost of services shall refer to those business expenses incurred directly and exclusively for the rendering of telecommunication services prior to and at the time of the rendition of the service. These business expenses shall be limited to: Subscriber-related expenses. These are expenses necessarily incurred in providing services to customers, but excluding collection services. Subscriber-related expenses shall be limited to: a) Expenses incurred for provision of value-added services (e.g., content provider fees, royalties, etc.); b) Expenses incurred in the production of prepaid cards (e.g., printing costs, duties, etc.); c) Depreciation of customer management system equipment which is necessary for service provisioning (e.g., call activation, roaming activation, etc.), as well as the related maintenance and operating costs thereof. d) Expenses incurred in the purchase and storage of telephone instruments prior to delivery to dealers/customers - Handset-related costs would normally include packaging and bundling costs, Page 6 of 14

7 warehousing and transfer costs within company premises or company-owned sales/business offices, installation costs, and other expenses incurred prior to sale to dealers/end-customers but excluding marketing and advertising costs Network-related expenses. Network-related expenses are the direct costs and expenses incurred in the operations and maintenance of the telecommunications network, limited to: a) Expenses incurred in the use of network facilities owned by other telecommunications companies, whether domestic or foreign (e.g., circuit rental, VSAT rental, facility service fees, capacity utilization/provisioning fee, etc.); b) Depreciation of network assets (e.g., telecom equipment/machinery, site improvements, buildings, warehouse, network computer systems, service vehicles, cable systems, satellite systems, etc.). Capitalized Interest related to the purchase of the asset can be deducted only through depreciation, thus, said interest can no longer be claimed as an outright expense; c) Site operating expenses (e.g., contractor services performed for network sites/exchanges, site utility expenses, gas and oil for sites, site rental, site insurance, site repairs and maintenance costs, license and permit fees, facility management fees, etc.); d) Share in operations and maintenance of cable networks; e) Salaries and benefits of personnel connected with the operations and maintenance of network facilities; f) Technical training expenses incurred for network personnel (e.g., training on network systems upgrade or newly installed software/system); Page 7 of 14

8 g) Outsource fees (e.g., expenses incurred for contractual or outsourced technical personnel or consultants); h) Transportation and accommodation expenses incurred by network personnel in the operation and maintenance of network facilities; i) Warehousing, freight and transfer costs incurred for machinery and spare parts to be delivered to the telecommunications company s various sites; j) Expenses incurred for the lease/rental of network assets (e.g., machinery/equipment, service vehicle, buildings, lots, etc.); k) Technical service fees paid in connection with technical service agreements; l) Capitalized Interest incurred in relation to the purchase of network assets which can be deducted through depreciation.; and m. NTC license and regulatory fees (e.g., supervision and regulatory fees, radio permits, spectrum fees, etc.) and local taxes and fees imposed on the franchised operation and network assets. Section 5. Value-Added Tax (VAT). Existing VAT rules and regulations as they currently apply to public telecommunications companies on their importation and sale of goods, and sale of services, shall be modified to the extent provided below. 5.1 Sale of Services Definition. For purposes of applying VAT on sale of services in the Philippines, the phrase sale of services shall mean the performance of telecommunications services in the Philippines. 5.2 Gross Receipts subject to VAT. The basis for computing VAT payable on transaction of telecommunications companies shall be the gross receipts derived from sale of services. For purposes of franchise grantees subject to VAT, gross receipts (as defined under Revenue Regulations No. 7-95, as amended) 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 Page 8 of 14

9 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 pursuant to interconnection and revenue sharing agreements; 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 120, Title V of the Tax Code (Overseas Communication Tax). 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 VAT on Interconnection Settlements Telecommunication companies enter into interconnection agreements which contain revenue sharing arrangements for charges on calls passing through their respective networks. These telecommunication companies may include either one or more local telecommunications companies and/or an FA. Depending on who is the subscriber of the collecting party, the collecting telecommunication company collects the whole amount of the charges from said subscriber. The share of the other telecommunications company becomes the subject of a settlement agreement. a. VAT on Interconnection Settlements on Calls subject to VAT This refers to interconnection settlements between local telecommunications companies over local and national long distance calls, both of which are generally subject to value-added tax. Collections from a telecommunications company s subscriber may include the share of a local public telecommunications pursuant to an interconnection agreement. The VAT collected in such instances should be reported by the collecting telecommunications company in full in the month when such collection was actually or constructively received, while the passed-on VAT (input tax) on the purchased service of the other telecommunication company for the interconnection paid in the form of share of such other telecommunications company shall be deducted from the gross output tax of the collecting telecommunications company in the taxable month when interconnection accounts are settled. The other telecommunications company, on the other hand, reports the output tax pertaining to its revenue share only in the month when interconnection accounts are settled since it is only at that time when it receives its share. In case of incoming call, paid or collect, whether the same is paid in foreign currency or not, the amount received by the local telephone company for its services in the Philippines shall be subject to VAT. Amount received by the local telephone company pertaining to the share of FA and therefore earmarked for a third party should be separately reflected in the issued VAT-receipt, which amount is not subject to VAT. Page 9 of 14

10 b. Tax on Interconnection Settlements on IGF- related outgoing calls This refers to interconnection settlements between local telecommunications companies and FA over outgoing calls which pass through the IGF of the said FA. Telecommunications companies which do not have their own IGF or have insufficient IGF capacity route international calls to the IGF of another telecommunications company. Both telecommunications companies share in the revenue generated by the call pursuant to an existing interconnection agreement. Outgoing calls are not subject to VAT. In case of outgoing calls, paid or collect, the same is subject to Overseas Communication Tax which is payable by the telephone company where the overseas message originates Roaming Charges Roaming charges can be characterized as inbound roaming, or when a Philippine telecommunications provider allows subscribers of a foreign telecommunication administration (FA) to use ( roam ) on its network while in the Philippines, or as outbound roaming, or when subscribers of a Philippine telecommunications company are given access to FA s network who is a roaming partner of the Philippine telecommunications provider, while outside the Philippines. In each of these situations, there are two contracts involved. The first is between the subscriber and his telecommunications provider in the home country. The second is between the Philippines and FA. Considering the transactions separately, the following tax treatments are to be adopted: a. Inbound roaming! The payment from the FA to the Philippine telecommunications company is subject to VAT, as the Philippine telecommunications company is rendering service in the Philippines! b. Outbound roaming! The payment from the Philippine telecommunications company to the FA is not subject to VAT, as the foreign provider is rendering service outside the Philippines.! The payment from the Philippine subscriber to the Philippine telecommunications provider is likewise exempt from VAT, since the Page 10 of 14

11 service was rendered outside the Philippines by the FA, the payment for which is coursed through the local telecommunications company International Leased Lines In the case of International Leased Lines where the other segment is provided by an FA, the share of the FA is not subject to VAT because the service is rendered by the FA outside the Philippines regardless of billing arrangements, i.e., whether or not the Philippine telecommunications company bills both ends of the Leased Lines. The charge for the segment of the leased lines provided by the local telecommunications company shall be subject to VAT. 5.3 Allowable Input Tax. To the extent possible, public telecommunications entities shall be entitled to claim as credit against output tax all input taxes that can be directly attributed to activities subject to VAT, and a ratable portion of input tax that cannot be directly attributed to either the taxable or exempt activity. In pro-rating the amount of input VAT creditable, public telecommunications companies shall use as basis the appropriate ratio between exempt and taxable sales, which ratio shall be based on gross receipts. Input taxes that cannot be claimed as credit against output tax shall form part of the cost of providing the goods or services and may be claimed as deductions against gross income for income tax purposes in the year they were incurred VAT Reporting Requirements. Revenue Regulations No. 7-95, as amended by Revenue Regulations No , requires VAT-registered persons to provide a detailed quarterly summary list of sales, which must contain the monthly total sales generated from customers who are engaged in business, regardless of the amount of sale per buyer/customer. Sales to customers who are not engaged in business shall be lumped together and reflected as just one single amount in the Schedule of Sales. Section 6. Overseas Communications Tax Rate and Basis of Overseas Communications Tax (OCT). A 10% OCT shall be imposed on the amount paid for every overseas dispatch, message or conversation transmitted from the Philippines by telephone, telegraph, telewriter exchange, wireless and other communication equipment services. The OCT is a tax on the subscriber/customer but it is the responsibility of the public telecommunications company to collect and remit the same. It is emphasized, however, that it is the originating telecommunication company that has the obligation to remit the OCT to the Bureau of Internal Revenue Interconnection Settlements on International Outgoing Calls Subject to OCT Page 11 of 14

12 This refers to interconnection settlements between a local telecommunications company and foreign administration over international long distance calls which pass through the IGF of another telecommunications company. In case of outgoing call, whether paid or collect, the charge to the customer shall be the service fee of the telephone company, domestic and foreign, as well as the 10% Overseas Communication Tax which tax shall be remitted by the telephone company originating the message. 6.2 Transactions Not Subject to OCT. The OCT does not apply to receipts from the provision of services, such as leased lines, that permit a subscriber to conduct international telecommunications. The OCT similarly does not apply to income from the provision of bandwidth capacity that permits another party to offer international communications services. Section 7. Official Receipt Issuance and Invoicing Requirements Statements of Account or Billing Statements. Statements of account or billing statements periodically issued by public telecommunications companies detailing the charges incurred by a subscriber are not considered as invoice or official receipt. Thus, they may indicate the VAT or OCT as a separate item from the services rendered Official Receipt Issuance Requirement When manual OR is issued, VAT OR must be issued for transactions subject to VAT whereas Non-VAT OR should be issued for transaction not subject to VAT but subject to OCT or exempt from any business tax. Taxpayers duly authorized to use Computerized Accounting System or stand-alone Point-of-sale Machine shall follow the rules/requirements set forth in the revenue issuances governing issuance of receipts of taxpayers using Computerized Accounting System or stand-alone Point-of-sale Machine. Section 8. Illustration of Telecommunication Transactions 8.1 Voice Services - A) Local Calls and National Toll Calls All local calls and national toll calls are subject to the 10% VAT. B) International Toll Calls a. Outgoing paid calls The PTE s revenue is derived from its gross billings to the subscriber. This type of call is exempt from VAT but subject to the 10% OCT. b. Outgoing collect calls The PTE s revenue is collectible from the FA. The entire fee for the service is subject to the 10% OCT but Page 12 of 14

13 exempt from VAT. The amount covering the OCT shall be turned over by the FA to the PTE, together with the latter s share for the service fee. c. Incoming paid calls - The PTE s revenue is collectible from the FA. PTE s share is subject to the 10% VAT. d. Incoming collect calls Revenue of PTE is derived from gross billings to the subscriber less the share of the FA. The gross receipt or the share of the PTE is subject to the 10% VAT. 8.2 Leased lines Domestic and international leased lines are generally subject to the 10% VAT. 8.3 SIM and Prepaid Cards - a. Tax Treatment on Original Sale of SIM and Prepaid Cards Telecommunications companies shall recognize income and accrue the VAT liability upon transfer or at the point of sale of the cards. The output tax shall be computed by multiplying the sales amount with the factor 1/11. b. Overseas Communication Tax on Prepaid Cards The applicable ten percent (10%) overseas communications tax on international toll calls made using the prepaid card shall be paid by the telecommunications company by effecting an adjustment to the output VAT liability which was recognized on the original sale of the cards. c. Invoicing Requirement for Prepaid Cards The telecommunications company making the original sale shall issue a duly-registered VAT invoice for every sale of the cards. The invoice shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by the seller as part of its accounting records. The buyer/dealer/distributor shall recognize the output tax billed by the seller as input tax credit. However, in case of business end-user that uses part of the prepaid card for outgoing call, an adjustment should be made in its input tax account by reducing or crediting this asset account with the amount corresponding to the previously recorded input VAT on the prepaid card used for outgoing calls. The removed input VAT amount shall be recorded as expense. 8.4 Short Messaging Service (SMS) or Multimedia Messaging Service (MMS). A) Local SMS/MMS Income from local SMS (i.e., text message) or MMS (i.e, image or audio, or combination of both), which is sent to a subscriber of the same or another local PTE, is subject to the 10% VAT, unless they are bundled in other services that are already subject to the 10% VAT. Page 13 of 14

14 B) International SMS/MMS Income from international SMS/MMS, which is sent to a subscriber of an FA shall be subject to the 10% OCT. Section 9. Repealing Clause. Any revenue issuances inconsistent with the provisions of these Regulations are considered amended, modified or revoked accordingly. Section 10. Effectivity Clause. These Regulations shall take effect fifteen (15) days after publication in the Official Gazette or any newspaper of general circulation, whichever comes first. JUANITA D. AMATONG Secretary of Finance Recommending Approval: GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue Page 14 of 14