August 17, 2009

BIR RULING [DA-(C-177) 460-09]

32 (A); 34; 105; RR 2; RR 2-98; #020-
99; DA-641-04;
#211-88; #641-04; DA-162-07; #641-
04; DA-162-07;
#510-03; DA 452-04; DA-143-05

Baniqued & Baniqued

Suite 803, 8/F Jollibee Centre
San Miguel Avenue
Pasig City

Attention: Atty. Carlos G. Baniqued

Atty. Laura Victoria A.S. Yuson-Layug
Gentlemen :

This refers to your letter dated May 12, 2009 requesting on behalf of
your client, Pilipino Telephone Corporation ("Piltel"), for confirmation of your
opinion on the tax consequences of the intended sale and transfer of Piltel's
Talk n' Text business and assets to its parent company, Smart
Communications, Inc. ("Smart"). ACTISE

Background
Prior to 2000, Piltel provided cellular telecommunications services
using various technologies. In response to market demands for value-based
services, particularly short message or texting services, in April 2000, Piltel
began offering prepaid cellular services under the Talk n' Text trademark
using the Global System for Mobile Communications ("GSM") platform of
Smart. Since then, Piltel's prepaid cellular services have become the main
component of its business.
To consolidate Piltel's cellular business under Smart, in March and April
of 2009, the Board of Directors of Piltel approved the proposal to sell and
transfer the company's Talk n' Text business and assets to Smart. The sale
and transfer of the Talk n' Text business and assets is expected to, among
others, enhance efficiency and economy in the provision of cellular
telecommunications services, simplify operations and promote cost
efficiency improvements, create wider market coverage and consolidation of
established brands.
The proposed sale of the Talk n' Text business and assets is intended
to be undertaken through: TcSICH

(i) the assignment of the Talk n' Text trademark covered by

Trademark Certificate No. 4-2000-001326 issued by the
Philippine Intellectual Property Office on December 16, 2005;
(ii) the transfer of Talk n' Text subscriber base for a consideration
equivalent to what Smart would have spent had it acquired
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 its own subscriber base. The Talk 'N Text subscriber base
(based on the number of Talk 'N Text Subscriber Identity
Modules ("SIMs") was around 16.5 million as of July 31, 2009.
On closing date, Piltel shall transfer to Smart the holders of
the Talk 'N Text SIMs (the "Subscribers") as of closing date
and Smart shall agree to take over and provide the Talk 'N
Text Services to the Subscribers in accordance with the
terms offered by Piltel to said Subscribers. Piltel offers voice
and data services such as text, MMS and value added
services (the "Talk 'N Text Services") via value-driven
packages, which include top-up services providing a fixed
number of messages with prescribed validity periods and call
packages which allow a fixed number of calls of preset
duration; and
(iii) the sale at net book value of assets consisting of land,
buildings and improvements, telecommunications
equipment, transportation equipment, furniture and tools,
installation materials, parts and supplies and inventories.
In support to your request, you submitted the following documents:
1. Proposed Equipment Sale and Purchase Agreement
2. Notarized Contract to Sell of Real Properties between Pilipino
Telephone Corporation and Smart Communications, Inc.
3. Proposed Deed of Absolute Sale
4. Proposed Deed of Assignment of Trademark
5. List of Real Properties to be transferred
6. Agreement to acquire the subscribers of the Talk 'N Text prepaid
GSM service
7. Consolidated Financial Statements as of December 31, 2008
On the basis of the foregoing, you now request for confirmation that
the sale by Piltel of its Talk n' Text business and assets to Smart shall have
the following tax implications: SADECI

1. On the assignment of the Talk n' Text trademark

1.1. Any income on the part of Piltel from the assignment of
the Talk n' Text trademark constitutes an item of gross
income (i.e., gain derived from dealings in property)
under Section 32 (A) of the 1997 NIRC, as amended,
subject to 30% regular corporate income tax. The
transaction shall not be subject to creditable
withholding tax ("CWT"), notwithstanding that Smart is
a large taxpayer, as the transaction is considered a sale
of intangibles, not a sale of goods or a sale of services
subject to withholding tax.
1.2. The consideration to be paid by Smart for the acquisition
of the trademark may be amortized over the remaining
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 life of the trademark and claimed as a deduction for
income tax purposes for such period.
2. On the transfer of the Talk n' Text subscriber base
2.1. Any income on the part of Piltel from the transfer of the
Talk n' Text subscriber base constitutes an item of
gross income (i.e., gain derived from dealings in
property) under Section 32 (A) of the 1997 NIRC, as
amended, subject to 30% regular corporate income tax.
The transaction shall not be subject to CWT,
notwithstanding that Smart is a large taxpayer, as the
transaction is considered a sale of an intangible, not a
sale of goods or a sale of services subject to
withholding tax.
2.2. The consideration to be paid by Smart for the acquisition
of the subscriber base may be amortized over the
average period customers usually retain their business
and claimed as a deduction for tax purposes.
3. On the sale of assets relating to the Talk n' Text business
3.1. Any income on the part of Piltel from the sale of assets
relating to the Talk n' Text business constitutes an item
of gross income (i.e., gain derived from dealings in
property) under Section 32 (A) of the 1997 NIRC, as
amended, subject to 30% regular corporate income tax.
As Piltel shall sell the assets at net book value, Piltel
shall not realize any gain on the sale of assets.
However, Smart shall withhold 6% CWT on the purchase
of real property used in business based on the highest
of zonal value, fair market value or gross selling price of
the real property and 1% CWT on the purchase of other
tangible assets based on the proceeds thereof, which
CWT Piltel may apply against its regular corporate
income tax.
3.2. Smart may depreciate the acquisition cost of the assets
acquired other than land over the remaining life thereof
and claim the same as a deduction for tax purposes.
We reply, as follows:
1. The assignment of the Talk n' Text trademark shall be subject to
30% regular corporate income tax or 2% MCIT, whichever is higher, on the
part of Piltel but shall not be subject to CWT.
Any income on the part of Piltel from the sale of the Talk n' Text trademark
for a fixed consideration constitutes an item of gross income ( i.e., gain
derived from dealings in property) under Section 32 (A) of the 1997 NIRC, as
amended, subject to the 30% regular corporate income tax. 1 In BIR Ruling
No. DA-641-04, dated December 17, 2004, this Office recognized that an
agreement involving the transfer of ownership over a trademark is subject to
the 32% [now 30%] regular corporate income tax. STADIH

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 The sale of the Talk n' Text trademark by Piltel to Smart is not subject to
CWT as such sale does not constitute a sale of goods subject to 1% CWT or a
sale of services subject to 2% CWT. Since the sale of a trademark constitutes
a sale of an intangible, 2 not a sale of goods or a sale of services, it is not
subject to CWT. In BIR Ruling No. DA-641-04, this Office confirmed that the
sale of a trademark is not subject to CWT.
The consideration to be paid by Smart for the acquisition of the trademark
may be amortized over the remaining life of the trademark and claimed as a
deduction for income tax purposes for such period.
On the part of Smart, the acquisition cost for the Talk n' Text trademark may
be amortized over the remaining life of the trademark and may be claimed
as a deduction for purposes of computing taxable income. The amortization
or depreciation of intangible assets or property is expressly allowed under
certain conditions as provided in Section 107 of Rev. Regs. No. 2, otherwise
known as the "Income Tax Regulations", to wit:
"SEC. 107. Depreciation of intangible property. — Intangibles, the
use of which in the trade or business is definitely limited in duration,
may be the subject of a depreciation allowance. Examples are patents,
copyrights, and franchises. Intangibles, the use of which in the
business or trade is not so limited, will not usually be a proper subject
of such an allowance. If however, an intangible asset acquired through
capital outlay is known from experience to be of value in the business
for only a limited period, the length of which can be estimated from
experience with reasonable certainty, such intangible asset may be the
subject of a depreciation allowance, provided the facts are fully shown
in the return or prior thereto to the satisfaction of the Commissioner of
Internal Revenue." (Emphasis supplied)
Thus, in BIR Ruling No. 211-88, dated May 20, 1988, this Office
confirmed that intangibles, the use of which in trade or business is definitely
limited in duration, may be the subject of depreciation allowance as provided
in Section 107 of the Income Tax Regulations. It was ruled that the
acquisition cost of trademarks, which is computed on the basis of future
sales discounted to its present value at the time of acquisition, can be
amortized for tax purposes over the average remaining life of the different
trademarks purchased.
Subsequently, in BIR Ruling No. DA-641-04, this Office again ruled that
the price paid for the purchase of trademarks may be claimed as a
deduction from taxable income as periodic charges to amortization pursuant
to Section 34 (F) of the 1997 NIRC. EIcSDC

In BIR Ruling No. DA-162-07, dated March 20, 2007, it was reiterated
that intangible assets such as trademarks may be considered depreciable
assets upon showing that their use in trade or business is definitely limited
in duration in accordance Section 107 of Rev. Regs. No. 2. It was further
added that since the trademarks acquired have a remaining life of 10 years,
they are regarded as intangibles subject to depreciation. The taxpayer was
thus allowed to amortize the cost of the trademarks acquired over their
remaining life from the date of sale.

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 2. The transfer of the Talk n' Text subscriber base shall be subject to
30% regular corporate income tax or 2% MCIT, whichever is higher, on the
part of Piltel but shall not be subject to CWT.
On the part of Piltel, any income from the transfer of Piltel's subscriber
base for a consideration equivalent to what Smart would have spent if it
were to acquire its own subscriber base constitutes an item of gross income
(i.e., gain derived from dealings in property) under Section 32 (A) of the
1997 NIRC, as amended, subject to 30% regular corporate income tax. 3
The sale of Piltel's subscriber base to Smart, a large taxpayer, is not
subject to CWT as such sale does not constitute a sale of goods subject to
1% CWT or a sale of services subject to 2% CWT. This is because the sale of
subscriber base constitutes a sale of an intangible, not a sale of goods or a
sale of services. cAEDTa

In BIR Ruling No. DA-452-04, this Office considered a customer list,

which is akin to a subscriber base, an intangible asset. In BIR Ruling No. DA-
641-04, this Office considered the sale of an intangible asset, particularly
Health Registration Data and Know-How, as not subject to CWT.
The consideration to be paid by Smart for the acquisition of the
subscriber base may be amortized over the average period customers
usually retain their business and claimed as a deduction for tax purposes.
The consideration to be paid by Smart to Piltel for the acquisition of
subscriber base may be amortized over the period the customers usually
retain their business relationship and may be claimed as a deduction for
purposes of computing income tax. Historically, Talk n' Text subscribers
retain their business relationship for a period of 21 months. Hence, Smart
may amortize the consideration to be paid for Piltel's subscriber base over a
period of 21 months and claim the same as a deduction for tax purposes.
In BIR Ruling No. DA-452-04, this Office allowed the taxpayer to
depreciate the acquisition cost for a customer list over a period of 5 years
considering that this was the average period customers retain their business
relationship. The BIR considered a two-pronged test to allow a depreciation
allowance to be taken on an intangible, that is, the intangible must have: (i)
an ascertainable cost basis; and (ii) a limited useful life the duration of which
can be ascertained with reasonable accuracy. It was concluded that since
the sale of the customer list has an ascertainable cost basis under the
parties' Asset Purchase Agreement and inasmuch as, based on the
experience of the taxpayer, it is reasonable to approximate the limited
useful life of the customer list for amortization purposes at 5 years since this
was the average period customers retain their business relationship, the
taxpayer was allowed to amortize the acquisition cost of the customer list. ADSIaT

As the acquisition by Smart of the subscriber base entails a capital

outlay and would have an ascertainable cost basis, and the average period
customers usually retain business may be determined with reasonable
accuracy, the consideration to be paid by Smart to Piltel for the subscriber
base may be amortized over the period cellular phone subscribers retain
their business (i.e., 21 months) and claimed as a deduction for purposes of
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 computing income tax.
3. Piltel shall not realize any gain on the sale of assets at net book
value. However, Smart shall withhold 6% CWT on the purchase of real
property used in business and 1% CWT on the purchase of other tangible
assets based on the proceeds thereof, which CWT Piltel may apply against its
regular corporate income tax.
Generally, any gain from the sale of assets used in business constitutes
an item of gross income (i.e., gain derived from dealings in property) under
Section 32 (A) of the 1997 NIRC, as amended, subject to 30% regular
corporate income tax. 4 If the assets consist of real properties, the sale of
real properties used in business shall be subject to an upfront 6% CWT. The
sale of assets not considered real property, on the other hand, shall be
subject to 1% CWT on the sale of goods if the payor is a large taxpayer.
Since the assets related to the Talk n' Text business shall be sold by
Piltel to Smart at net book value, no gain shall be realized on the sale and
the transaction will not be subject to 30% corporate income tax. However,
the sale of real property used in business shall, nonetheless, be subject to
6% CWT based on the zonal value, fair market value or selling price,
whichever is highest, of the real property which tax must be withheld by
Smart from the selling price paid to Piltel. 5 On the other hand, the sale of
tangible assets other than real property shall be subject to 1% CWT on the
sale of goods considering that Smart is a large taxpayer. 6 The taxes
withheld by Smart from Piltel may be used by Piltel as tax credit against its
income tax liability. CcHDaA

Smart may depreciate the acquisition cost of the assets acquired over
the remaining life thereof and claim the same as a deduction for tax
purposes.
Upon acquisition, Smart may depreciate its acquisition cost for the
assets other than land over the remaining useful life of the assets and claim
the same as an expense in computing its income tax liability. 7
In view thereof, this Office confirms your opinion that the sale of the
Talk n' Text business and assets shall have the following tax implications:
1. On the assignment of the Talk n' Text trademark
1.1. Any income on the part of Piltel from the assignment of
the Talk n' Text trademark constitutes an item of gross
income (i.e., gain derived from dealings in property)
under Section 32 (A) of the 1997 NIRC, as amended,
subject to 30% regular corporate income tax. The
transaction shall not be subject to CWT,
notwithstanding that Smart is a large taxpayer, as the
transaction is considered a sale of an intangible, not a
sale of goods or a sale of services subject to
withholding tax.
1.2. The consideration to be paid by Smart for the acquisition
of the trademark may be amortized over the remaining
life of the trademark and claimed as a deduction for
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 income tax purposes.
2. On the transfer of the Talk n' Text subscriber base
2.1. Any income on the part of Piltel from the transfer of the
Talk n' Text subscriber base constitutes an item of
gross income (i.e., gain derived from dealings in
property) under Section 32 (A) of the 1997 NIRC, as
amended, subject to 30% regular corporate income tax.
The transaction shall not be subject to CWT,
notwithstanding that Smart is a large taxpayer, as the
transaction is considered a sale of an intangible, not a
sale of goods or a sale of services subject to
withholding tax.
2.2. The consideration to be paid by Smart for the acquisition
of the subscriber base may be amortized over the
average period customers usually retain their business
and claimed as a deduction for tax purposes.
3. On the sale of assets relating to the Talk n' Text business
3.1. Any income on the part of Piltel from the sale of assets
relating to the Talk n' Text business constitutes an item
of gross income (i.e., gain derived from dealings in
property) under Section 32 (A) of the 1997 NIRC, as
amended, subject to 30% regular corporate income tax.
As Piltel shall sell the assets at net book value, Piltel
shall not realize any gain on the sale. However, Smart
shall withhold 6% CWT on the purchase of real property
used in business based on the highest of zonal value,
fair market value or gross selling price of the real
property and 1% CWT on the purchase of other tangible
assets based on the proceeds thereof, which CWT Piltel
may apply against its regular corporate income tax.
3.2. Smart may depreciate the acquisition cost of the assets
other than land acquired over the remaining life thereof
and claim the same as a deduction for tax purposes.
Finally, this covers only the income tax implications of the foregoing
transactions as requested by the taxpayer, and shall not include other taxes
that may be due on the sale by Piltel of its Talk n' Text business and assets
to Smart, such as but not limited to land, buildings and improvements,
telecommunications equipment, transportation equipment, furniture and
tools, installation materials, parts and supplies and inventories, trademark
and subscriber base.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation, it will be disclosed that the
facts are different, then this ruling shall be considered null and void. DaTICc

Very truly yours,

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 Commissioner of Internal Revenue
By:

(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service
Footnotes

1. Section 27 (A) in relation to Sections 31 and 32 of the 1997 NIRC.

2. BIR Ruling No. 211-88, dated May 20, 1988.
3. Section 27 (A) in relation to Sections 31 and 32 of the 1997 NIRC.
4. Section 27 (A) in relation to Sections 31 and 32 of the 1997 NIRC.
5. Section 2.57.2 (J) of Rev. Regs. No. 2-98, as amended by Rev. Regs. No. 6-01
and Rev. Regs. No. 17-03.
6. Section 2.57.2 (M) of Rev. Regs. No. 2-98, as amended by Rev. Regs. Nos. 6-01,
17-03 and 14-08.
7. Section 34 (F), 1997 NIRC.

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