Technical Assitance on Regulatory & Operational Enhancements of the Telecommunications Industry

TECHNICAL ASSISTANCE ON REGULATORY AND OPERATIONAL

ENHANCEMENTS OF THE TELECOMMUNICATION INDUSTRY

Atty. Rachel P. Follosco, FMH

November 2007

DISCLAIMER

“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency for International Development (USAID) and the Ateneo de Manila University”.

WORKING DRAFT 2-16Oct07 FOR DISCUSSION PURPOSES ONLY ATTY. RACHEL P. FOLLOSCO, FMH, Consultant

REPUBLIC OF THE PHILIPPINES

DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE

REVENUE REGULATIONS NO.__________

SUBJECT: Taxation of Mobile Telecommunications Companies and Their

Transactions TO: All Internal Revenue Officers and Others Concerned Section 1. Purpose of the Regulations. – These Regulations are being issued to lay down uniform treatment, for tax purposes, of various transactions of public mobile telecommunications companies (Mobile Telcos) and thereby confirm, correct, or amend (as necessary) existing industry practice to ensure fairness and equality in the treatment of transactions across the industry and among subscribers of Mobile Telco service and consistency with the provisions of the National Internal Revenue Code of 1997, as amended (NIRC). These Regulations are further intended to address the issues and ambiguities in the application/applicability of existing Regulations in view of recent developments in the Mobile Telco industry, particularly, the fast expanding service offerings of Mobile Telcos, as propelled by significant technological advancement in the industry.1 The intention is to subsequently align the tax treatment of transactions of Mobile Telcos with those of landline telecommunications service providers to the extent that the transactions are similar or comparable. Section 2. Scope. – Pursuant to the provisions of Section 244 of the NIRC, these Regulations are hereby promulgated to clearly define the applicable taxes on various transactions of all duly authorized Mobile Telcos and to establish a practical mechanism for their effective collection.

1 These Regulations shall, to the extent possible, prescribe applicable tax treatment of Mobile Telco transactions guided by the policy that Mobile Telco transactions shall be treated similarly as transactions of fixed-line telecommunications companies, thus, regardless of the underlying technology used (i.e., it is intended to be technology-neutral). Accordingly, taxation of prepaid services shall be the same as postpaid services; landline calls should be taxed in exactly the same manner as wireless calls; internet to mobile phones and mobile phones to internet should be taxed as similarly as possible as regular SMS/calls, to the extent that there is a termination fee. Likewise, telephone services availed using prepaid airtime load, whether purchased through Prepaid Cards or E-load should have the same tax implications/consequences.

With respect to activities of Mobile Telcos which are outside of their usual scope of activities as telcos, such as e-money issuance and remittance service, Mobile Telcos should be placed on equal footing with non-telecommunication businesses organized principally to offer the same services (such as remittance companies in the case of remittance service or credit card companies in the case of e-money issuance).

Economic Policy Reform and Advocacy Ateneo de Manila University-USAID


Section 3. Definition of terms.2 – For purposes of these Regulations, the terms hereunder enumerated shall have the following meaning: a. Access Charges (also interchangeably referred to as Interconnection Charge/

Interconnect Usage Charge) – remuneration paid to a Public Telecommunications Entity (PTE)/Foreign Administration (FA) by an interconnecting PTE/FA for accessing the facilities and/or customer base of such PTE/FA or for network interconnect usage on interconnected networks, which are needed by the interconnecting PTE/FA for the origination, termination, and/or transiting of all types of traffic derived from the interconnection.3 For purposes of these Regulations, Access Charge shall include fees for Indirect Access, as the term is hereinafter defined.

b. Activation Fee (also interchangeably referred to as Registration Fee) – is the initial

set up fee to turn on a cell phone so that it can operate within the selected carrier network or any initial fee which may be charged prior to extending a particular type of service to a subscriber.

c. Bandwidth – is the maximum achievable data rate or amount of information or data that

can be sent or transmitted over a network connection or channel in a given period of time; it refers to the speed at which data can be transferred over the system, as usually measured in bits per second (bps), kilobits per second (kbps), or megabits per second (mbps) and the higher a channel’s bandwidth, the more information it can carry.4

d. Billing Information – appropriate network usage data of one PTE that is required by

another PTE to facilitate customer billing with attendant acknowledgement and status reports and are exchanged between PTEs to process claims and adjustments.

2 To the extent applicable, definitions of telecommunications terms were lifted from Memorandum Circular No. 14-7-2000 (Subject: Implementing Rules and Regulations (IRR) For the Interconnection of Authorized Public Telecommunications). 3 Pursuant to NTC Memorandum Circular No. 14-7-2000 (Implementing Rules and Regulations (IRR) for the Interconnection of Authorized Public Telecommunications Entities), specifically Article XII thereof, it is provided that “The charges for basic interconnection service shall be by way of access charges for network usage on interconnected networks and shall consist of discrete charges, for call origination, call transiting and call termination, and a network interconnect subsidy for the LEC, if it be the other party to the interconnection but this subsidy shall not apply where the interconnected networks are both LECs. The LEC shall be entitled to such subsidy albeit it is at the same time an IGF and/or CMTS operator.” Is there a need to carve out the subsidy referred to from the definition of Access Charge? It needs to be ascertained whether the subsidy is relevant/applicable to Mobile Telcos. 4 SMS requires very little bandwidth to be transmitted compared to voice calls. Recent and emerging applications such as multimedia messaging (MMS) adds images and audio clips to the SMS text messaging format and therefore require considerably more bandwidth than an SMS. Bandwidth usage is expected to further increase significantly, given the technology forecasts on fixed-mobile convergence (FMC). In general, stationary end-user devices (e.g. desktop or laptop computers) can support more bandwidth or higher data rates, while more mobile devices (e.g. cell phones) are expected to support less bandwidth. Fixed-mobile convergence, made possible by internet protocol (IP), brings together mobility and services that require more bandwidth. That is, FMC leads to empowering the cellular phone to carry more bandwidth and therefore support such applications as internet browsing that is as fast as when using broadband connections in stationary computers.


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e. Cash Remittance Service – shall refer to the service provided by the Mobile Telcos

enabling cash received by any Mobile Telco business center or authorized agents/remittance partners, from a sender in the Philippines or abroad, to be transferred or remitted to a beneficiary who is a subscriber of the Mobile Telco concerned, which the latter may receive and keep in electronic form as e-cash or encash with any of the business centers of the Mobile Telco of the recipient/beneficiary, or through any of the authorized agent paying centers including ATMs of agent banks.

f. Cellular Mobile Telephone Systems (CMTS) – a wide area mobile radio telephone

systems with its own switch, base stations and transmission facilities capable of providing high capacity mobile telecommunication by utilizing radio frequencies.5 Providers of telecommunications services using CMTS are hereinafter referred to as “CMTS carriers” or “Mobile Telcos”.

g. Circuit Rentals – Remuneration paid for a fully operative communication path used

for message, access or private line services. h. Content Provider6 – an entity/organization that creates and/or maintains a database

of information/data and which may offer services and products to the public for compensation.

i. Deposits – shall refer to amounts required to be deposited by a Mobile Telco either

prior to activating a particular service or releasing phone units or other gadgets sought to be leased to a subscriber, which, unlike activation charge, is intended to be returned by the receiving Mobile Telco to the subscriber unless certain deductions or charges (such as to cover the cost of repair of a damaged leased handset) are set-off against the amount such that only the balance is returned to the subscriber.

j. Electronic Loading or E-load – is a electronic system used to sell, on prepaid basis,

airtime credits to pre-paid telephone service subscribers, in lieu of the use of prepaid cards.

k. Electronic Money/E-money (also known as electronic cash, electronic currency,

digital money, digital cash, digital currency or scrip) – tokens or representations of value but expressed in digital form which enable the users thereof to store value, transmit, and receive tokens of value, ultimately, allowing the user to move funds electronically and to effect electronic payments of generally limited amounts. Value that is converted into tokens in digital form is created upon actual deposit of cash with the telcos, through any of their business centers, or through automatic/electronic

5 Definitions in red font may not be necessary/relevant to mobile telcos. 6 All Content Providers are already required, pursuant to Memorandum Circular No. 03-03-2005-A (July 3, 2006) to be registered.


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debit against the account of the person with a bank such as when the user executes the transaction through an ATM, mobile phone, or through the internet.

l. Electronic Wallet – is the electronic equivalent of a traditional physical wallet which

holds digital or E-money residing in the mobile phone unit of a mobile phone subscriber and linked to the server of the electronic wallet service provider and the digital money therein stored may be recharged via electronic money systems and can thus operate similar to a virtual debit card from where payment for goods and services purchased may be sourced and electronically transmitted to the seller.

m. Franchise – a privilege conferred upon a telecommunications entity by Congress,

authorizing that entity to engage in a certain type of telecommunications service. n. Foreign Administration (FA) – a foreign telecommunications company. o. Incoming Collect Calls – telephone calls originating from a subscriber or customer

of a PTE and terminating to and paid by a subscriber or customer of the terminating PTE.7

p. Incoming Paid Calls – telephone calls originating from a subscriber or customer of a

PTE and paid to that PTE. q. Indirect Access – is a situation where a customer’s call is routed and billed through

the network of a PTE even though the call originated from the network of another PTE.

r. Interconnection – the linkage by wire, radio, satellite or other means, of two or more

existing PTEs with one another for the purpose of allowing or enabling the subscribers or customers of one PTE to access or reach the subscribers or customers of another PTE.

s. Interconnect Usage Charge – the network usage charge applicable to direct and

indirect interconnections between networks for call origination, call termination, or call transit, as the case may be.

t. International Gateway Facility (IGF)/International Private Leased Circuit

(IPLC) – 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.

u. International Gateway Facility Operator – a telecommunications carrier providing

IGF services.

7Normally the originating party pays for the call, although at the moment, in limited instances, Mobile Telcos are able to support collect call service, i.e., prior registration is required for this service and the caller is from the same network and the is one of the callers specifically registered by the person called to be entitled to call collect.


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v. 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.

w. International Toll Calls – calls are: (1) originating from one local calling (service)

area and terminating to a foreign calling (service) area; or (2) originating from an FA and terminating in a local public telecommunications entity, or vice-versa.

x. Local Calling (Service) Area – the province within which telecommunications

services are furnished subscribers under specific scheduled rates and without toll charges. For purposes of these rules, the present areas forming part of the numbering plan area “2” shall be considered a local calling (service) area of all PTEs presently authorized to provide telecommunications service in any portion of the said area.

y. Load Value – shall refer to the monetary value of airtime credits that was or will be

loaded into subscriber’s account by the Mobile Telco on account of his purchase of Prepaid Credit, irrespective of the actual consideration that he may have paid for the Prepaid Credit, i.e., whether at a premium or at a discount.8

z. Local Calls – Calls originating and terminating from one and the same PTE or two

(2) separate PTEs within the same local calling area. aa. Local Exchange Carrier (LEC) – a PTE providing transmission and switching of

telecommunications services, primarily but not limited to voice-to-voice service, in a geographic area anywhere in the Philippines.9

bb. Multimedia Messaging Services (MMS) – are content-based services which include pictures, text, audio, and video offerings, constituting the natural progression from Short Messaging Service (SMS)-based product offerings.

cc. NTC – National Telecommunications Commission. dd. National Toll Calls – calls that are (1) originating from one local calling (service)

area and terminating in another local calling area (service) or (2) originating from another PTE to a CMTS carrier, or vice-versa.

8 Under current industry practice, Mobile Telcos do not consider the Load Value of the Prepaid Credit that they sell for purposes of reporting their income from the sale of Prepaid Credits. Their revenue from the sale of Prepaid Credits is only equivalent to the price at which they sell the Prepaid Credits to Prepaid Load Dealers. Thus, a subscriber may purchase Prepaid Credit worth Php100.00 for Php95.00 or Php100.00 from a Prepaid Load Dealer and the Mobile Telco will accordingly load the subscriber’s account with airtime credits equivalent to Php100.00, notwithstanding the fact that the Mobile Telco only received Php85.00 from the Prepaid Load Dealer and that the subscriber either paid Php100.00 or PhP 95.00 for the same. However, notwithstanding loading airtime credit valued at Php100.00 to the account of the subscriber, it only recognizes in its books, gross revenue from the transaction of Php85.00 less the 12% VAT component thereof. 9In the Philippines since mobile telcos or mobile carriers cover a vast almost nationwide service they really can not fall in this “local” category. LEC’s are normally “wired” telephone exchanges.


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ee. Outgoing Collect Calls – telephone calls originating from a subscriber or customer of one PTE and paid by the subscriber or customer of the terminating PTE.10

ff. Outgoing Paid Calls – telephone calls originating from and paid by the subscriber or

customer of the originating PTE. gg. Payment Conduits – shall refer to banks and credit card companies or other

establishments or institutions which simply provide payment facilities for the purchase of electronic load and do not purchase and sell e-load or issue e-money to Mobile Phone subscriber;

hh. Peer-to-peer Loading – commonly referred to as “Pasa-Load”/ “Share-a-Load”,

referring to the electronic transfer of airtime/load credits from one subscriber to another subscriber of the same Mobile Telco;

ii. Premium-rated Services – shall include services rendered by or through the Mobile

Telco whether using MMS, SMS, or other format, which are charged at a premium price, i.e., higher than the regular charge for MMS, SMS, or such other format used, either because of a fee sharing arrangement with a third party for the content provided or additional service rendered, such as bank balance inquiry service or the service allows the subscriber to participate in a promotion being undertaken by a particular company, television or radio show, or other entity, such as those required to be sent to 4-digit designated receiving numbers, e.g. 2366.

jj. Prepaid Card – refers to a card that has on its face, a value or denomination, the

payment for the privilege to use the services offered by the telecommunications company, with an expiry date such that the value of the unused portion after expiry date is waived in favor of the issuing telecommunications company;

kk. Paid Credit – for purposes of these Regulations, this term shall refer to pre-paid

airtime credits purchased for use to avail of telecommunications service, whether purchased through the purchase of Prepaid Card or Electronic Loading.

ll. Prepaid Load Dealers – shall refer to those engaged in the business of buying e-load

and Prepaid Cards from the Mobile Telco and selling the same to other dealers, retailers, and end users of E-load/Prepaid Cards, whether or not they are required to have a special SIM for the purpose.

mm. Prepaid Subscription – a type of subscription of a Mobile Telco customer which

does not require monthly fixed subscription but is maintained by virtue of airtime credits that may be bought and credited (or loaded) into the mobile phone units from

10 May not be applicable to mobile telcos at the moment as they offer mobile telecommunications services on a calling-party-pays basis, under which subscribers pay only for calls that they originate, in addition to possible roaming charges, although Globe, for example, does extend call collect feature on a limited basis and subject to prior registration and only between or among its own subscribers and solely for local calls. This is normally required to be operator-assisted as there is a need to get the approval of the called party to accept the charges.


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time to time and consumed, subject to validity period limitations and minimum airtime load policy of the Mobile Telco concerned, where the prepaid amount of credits available is stated in terms of its peso equivalent and is commonly referred to as “load”.

nn. Postpaid Subscription Plans – are mobile telephone subscriber plans which require

the Mobile Telco to bill the subscriber on a periodic basis, generally on a monthly basis, and the amount to be paid depends on the usage or the number of credits used per month, subject to a minimum monthly subscription fee which may or may not include corresponding minimum airtime/service credits.

oo. Public Telecommunications Entity (PTE)11 – any person, firm, partnership or

corporation, government or private, duly enfranchised by law and duly authorized by the NTC to engage in the provision of particular telecommunications services to the public for compensation; it is a local PTE if it is organized and existing under Philippine laws. Unless otherwise expressly provided, CMTS carriers, i.e., Mobile Telcos are deemed included in the term PTE.

pp. Revenue Fee Sharing Agreement – 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.

qq. Roaming – the use of a wireless phone outside of the “home” service area defined by

the service provider which in the case of Mobile Telcos shall refer to the use of a mobile phone of a subscriber outside of the Philippines.

rr. Roaming charges – refer to the charges incurred by a subscriber of a Mobile Telco

while abroad, such as call or other service charges imposed by an FA/Mobile Telco for telecommunications services rendered to a subscriber of a roaming partner PTE/FA as well as the administration/service fee charged by the Mobile Telco of the roaming subscriber.

ss. In-collect Roaming Charge – shall refer to the charges accumulated by a subscriber

of a LEC for communications services rendered by an FA while such subscriber was outside the Philippines (airtime charges levied by a FA with respect to the use of the FA’s system by a local Mobile Phone subscriber while roaming in the FA’s service area).

tt. Out-collect Roaming Charge – shall refer to the charges accumulated by a

subscriber of an FA in the Philippines for communications services rendered by a LEC while such subscriber was in the Philippines (airtime charges levied by a local Mobile Telco with respect to the use of its system by a subscriber of an FA while roaming in the local Mobile Telco’s service area).

11 Since PTE is defined as those authorized by NTC to provide telecom services, for purposes of these Regulations, “PTE” shall be deemed to refer to a local public telecommunications entity, in contrast to an FA.


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uu. Roaming administration fee/Surcharge – shall refer to the additional charge

imposed by the LEC on top of the base rate charged by a foreign telecommunications company for services availed by a subscriber while roaming to cover any additional costs to the LEC, if applicable.

vv. Satellite – a radio relay station that orbits the earth. A complete satellite

communications 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 stations(s).

ww. Settlement Process – the payment system between interconnecting PTEs for jointly

providing telecommunications services by which PTEs compensate each other for interconnection services.

xx. 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;

yy. Telecommunications – any process which enables a telecommunications 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.

zz. Telecommunications Services – services offered for a fee directly to the public, or to

such classes of users as to be effectively available directly to the public, regardless of the facilities used, consisting wholly or partly in the transmission and routing of signals on authorized telecommunications networks.

aaa. Termination Charges – are the charges incurred when a mobile phone call is

completed by a different carrier network. For purposes of these Regulations, Termination Charge shall be deemed included in the definition of Access Charge.

bbb. Value-Added Service (VAS) – refers to a service which adds a feature or value to

basic telephone service not ordinarily provided by a PTE such as format, media, conversion, encryption, enhanced security features, paging, internet protocol, computer processing and the like. The term value-added services may be alternatively referred to as enhanced service.

ccc. Usage Data Record – may invariably be referred to as Event Detail Record or if

intended to refer specifically to the record of the details of a voice call, Call Detail Record.

In case of ambiguity or need for further clarification of the definition of the telecommunications-related terms in these Regulations, reference shall be made to the definitions and applicable Memorandum Circulars of the NTC.


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Section 4. Revenues of Mobile Telcos.—For purposes of these Regulations, revenues of Mobile Telcos shall be classified into either income from (a) their performance of core services or (b) non-core services/activities.12

12The NTC Chart of Accounts has the following detailed revenue accounts which may be used in classifying Mobile Telco income: BASIC LOCAL SERVICE REVENUES (9110/9120/9130/9140/ 9150/9160)-Flat Rate-Business/Flat Rate-Residential/Trunklines/Extension Stations/Local Usage- Metered Rates-Business/Local Usage-Metered Rates-Residential - These accounts shall include revenues derived from the provision of basic area message services, revenues derived from non-optional extended area services and revenues derived from the billed or guaranteed portion of semi-public services. This is inclusive of recurring monthly charges and monthly billed usage charges. 9170 - Foreign Currency Adjustment - include the net amount of rate adjustments made in cases of depreciation or appreciation of the Philippine currency against the US dollar for the current period. The rate is generally a percentage increase or decrease for every centavo increase or decreases in the exchange rate of the Philippine peso vis-à-vis the US dollar. 9180 - Optional Extended Area Revenue - include total revenue derived from the provision of optional extended area services. 9190 - Public Pay Stations Service Revenue - include message revenue (e.g., coin paid) and other revenue derived from public and semi-public telephone services provided within the basic service area. 9200 - Subscriber's Connection Charges - includes revenue derived from the reconnection of a temporary disconnection or the transfer of an existing communication line (pager, telephone etc.). This account also includes the revenue from the disposal of handsets and accessories, paging receivers and accessories, trunked radio and accessories. 9210 - Installation Charges - This refer to charges for the initial installation of communication lines. 9220 - Local Private Line Revenue - include revenue derived from local services that involve dedicated circuits, private switching arrangements, and/or predefined transmission paths, whether virtual or physical, which provide communications between specific locations (e.g., point-to-point communications). It includes revenue from sub voice grade, voice grade, audio and video program grade, digital transmission and local private network switching as well as the revenue from administrative and operational support services associated with private network services and facilities, e.g., charges for company-directed testing, expedited installation, and service restoration priority. 9290 - Basic Local Services Revenue- Others - This account shall include revenues from basic local services other than those included under Account nos. 9110 through 9220. INTERCONNECTION ACCESS REVENUES (National / International / Local Network / Cellular Mobile Service / Interconnection Access Revenue - Others ) 9310/9320/9330/9340/9390 - This account shall include revenue derived from provision of exchange access services to an inter-exchange carrier or to an end user of telecommunications services beyond the exchange carrier's network. LONG DISTANCE NETWORK REVENUES (9410/9420/9430/9440)-LONG DISTANCE REVENUE - This account refers to revenue derived from message services that terminate beyond the basic service area of the originating wire center and are individually priced. This includes message services which utilize the public long distance switching network and the basic subscriber access line. This account also includes revenue derived from individually priced message services offered under calling plans (discounted long distance) which do not utilize dedicated access lines; as well as those priced at the basic long distance rates where a discounted toll charge is on a per message basis. Any revenue derived from monthly or one-time charges for obtaining calling plan services is likewise included in this account. 9450/9460 -Operator Surcharge/Report Charge Revenue - These accounts shall include revenues derived from operator assisted calls both national and international. 9470/9480 -Public Calling Office Service Revenue - These accounts shall include revenues derived from calls made by customers from public pay telephones both national and international.


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9490 - Long Distance Network Revenue - Others - This account shall include long distance revenues other than those included under Accounts 9410 through 9480. OTHER SERVICES REVENUES (9510/9520/9530/9540/9550/9570/9580/9590) - Telex / Telegram – National/ Telex / Telegram – International/Trunk Radio Service Revenue/ Facsimile / Fax Services – National / Facsimile / Fax Services – International /Customer Premises Revenue / Value Added Services Revenue / Other Services - National (Specify) / Other Services - International (Specify) - Other Services Revenue - These accounts shall include revenue derived from telex, telegram, trunk radio service, facsimile, value-added services both national and international. 9560 - Customers Premises Revenue - This account shall include revenue derived from the use of facilities and equipment provided by the company such as PABX/PBX and telephone set rentals CELLULAR MOBILE SERVICE REVENUES - 9610 - Airtime Fees - This account shall include revenue derived from the subscribers' airtime usage of cellular phones whether local, national or international. 9620 - International Roaming - Airtime - This account shall include revenue derived from a cellular service which enables subscribers to use their cellular phones in certain countries with which the telecommunications company has a roaming agreement and for foreign subscribers to use the local telecommunications company's network for their cellular calls. 9630 - Text Messaging Fee - This account shall include revenue derived from cellular subscribers for text messaging services. 9650 - Registration Fees - This account shall include the one-time charge made upon subscribers when they initially subscribe to the company's cellular services. 9660 - Subscription Revenue - Cellular Mobile Service - This account shall include the monthly service/subscription fees charged to cellular phone subscribers. 9680 - Lease Income - Cellular Phones - This account shall include the income derived from the monthly installment of cellular phones when subscribers opt to defer payment of the unit over a period of several months. 9690 - SIM Card Revenue - This account shall include the revenue derived from the sale of SIM (Subscriber Identity Module) cards to subscribers. CELLULAR MOBILE SERVICE REVENUES 9720 - Subscription Revenue - Paging Service - This account shall include the net monthly service/subscription fees charged to paging service subscribers. 9730 - Lease Income - Pagers - This account shall include revenue derived from the monthly installment of pagers when subscribers opt to defer payment of the unit for a period of several months. 9740 - Customized Greeting Fees - This account shall include the revenue derived from the monthly fee charged to paging subscribers for customized greetings in their pagers. SATELLITE PROVIDER SERVICE REVENUES – (9810/9820/9830/9840/9850/9860/9870/9880/9890) - Fulltime Circuits / Business Service Income / Television Circuits / Restoral Circuits /Occasional Circuits Accounting Authority Revenue / Co-Location Revenue /Share in Satellite Revenues -Satellite Provider Service Revenues - These accounts shall include revenues derived from fulltime circuits, business service income, television circuits, restoral circuits, occasional circuits, accounting authority, co-location, share in satellite revenue. TRUNKING SERVICE REVENUES -9920 - Subscription Revenue - Network Franchise Fees - This account shall include revenue derived from subscription fees paid by trunked radio subscribers. 9930 - Service Income - This account shall include revenues derived from shop repair labor fees, installation and relocation of mobile/base radio, and trouble call charges. 9940 - Lease Income - This account shall include revenue derived from the rental or lease of handheld and mobile radios with option to purchase at the end of the lease.


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MISCELLANEOUS OPERATING REVENUES 10010 - Directory Revenue - This account shall include revenue derived from alphabetical and classified sections of directories and shall also include fees paid by other entities for the right to publish the company's directories. 10020 - Rent Revenue - This account shall include revenue (including taxes, when borne by the lessee) derived from the rental or sub-rental to others of telecommunications plant furnished apart from telecommunications services rendered by the company. It includes revenue from the rent of such items as space in conduits, pole line space for attachments, and any allowance for return on property used in joint operations and shared facilities. 10030 - Corporate Operations Revenue - This account shall include revenue derived from services rendered to other companies under a license agreement, general services contract, or other arrangement providing for the furnishing of general account, financial, legal patent, and other general services associated with the provision of regulated telecommunications services. 10040 - Revenue from Sale of Equipment - This account shall include revenue derived from the sale of equipment used in operations. 10090 - Other Miscellaneous Revenue- This account shall include operating revenue other than those included under Accounts 10010 through 10040. OTHER OPERATING INCOME 13110 - Income From Custom Work - This account shall include profits realized from custom work (plant construction) performed for others incident to the company's regulated telecommunications operations. This includes profits from the incidental performance of non-tariffed construction activities (including associated engineering and design) for others which are similar in nature to those activities which are performed by the company in constructing its own telecommunications plant facilities. The records supporting the entries in this account shall be maintained with sufficient detail to identify separately the revenue and costs associated with each undertaking. 13120 - Return from Non-Regulated Use of Regulated Facilities - This account shall include a return on investment for the use of regulated property, plant and equipment to provide non-regulated products and services. 13130 - Gains from Foreign Exchange - This account shall include all gains resulting from the exchange of foreign currency. Transaction (realized) gains shall be measured based on the exchange rate in effect on the transaction date. Unrealized gains shall be measured based on the exchange rate in effect at the balance sheet date. 13140 - Gains from Disposition of Land and Artwork - This account shall include gains resulting from the disposition of land and artworks. 13190 - Other Operating Income - This account shall be credited to record the results of transactions, events or circumstances which are of an operational nature, but which occur irregularly or are peripheral to the major or central operations of the company and not provided for elsewhere. NON-OPERATING INCOME 15110 - Dividend Income - This account shall include dividends on investments in common and preferred stock, which is the property of the company, whether such stock is owned by the company and held in its treasury, or deposited in trust (except in sinking or other funds) or otherwise controlled. These accounts shall not include dividends or other returns on securities issued or assumed by the company and held by or for it, whether pledged as collateral, or held in its treasury, in special deposits, or in sinking or other funds. 15120 - Interest Income - This account shall include interest on securities, including notes and other evidences of indebtedness, which are the property of the company, whether such securities are owned by the company and held in its treasury, or deposited in trust (except in sinking fund or other funds) or otherwise controlled. There shall be included in this account for each month the applicable amount requisite to extinguish, during the interval between the date of acquisition and date of maturity, the difference between the purchase price and the par value of securities owned, the income from which is included in this account. Amounts thus credited or charged shall be concurrently included in the accounts in which the securities are carried. Any such difference remaining at the sale or upon the maturity and satisfaction of such securities shall be cleared to Account 15190, Other Non-Operating Income or Account 16190, Other Non-Operating Expense.


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Section 4.1. Core services.13— These pertain to services rendered by Mobile Telcos which are not generally allowed to be pursued other than under the authority of a telecommunications franchise duly granted to them. Its core services are available to its

15140 - Other Interest Income - This account shall include interest earned on properties of the company other than those included in Account 15120. 15190 - Other Non-Operating Income - This account shall include non-operating income other than those included in Accounts 15110 through 15140. The FCC Uniform Chart of Accounts classifies telco income as follows: 32.5000 Basic local service revenue. 32.5001 Basic area revenue. 32.5002 Optional extended area revenue. 32.5003 Cellular mobile revenue. 32.5040 Private line revenue. 32.5060 Other basic area revenue. 32.5081 End user revenue. 32.5082 Switched access revenue. 32.5083 Special access revenue. 32.5100 Long distance message revenue. 32.5200 Miscellaneous revenue. 32.5230 Directory revenue. Excerpts of explanations/definitions on the foregoing: • The revenue accounts are intended to include the actual cash inflows (or equivalents) that have or will

occur as a result of the company's ongoing major or central operations during the period. • Those charges and credits resulting from contractual revenue pooling and/or sharing agreements shall be

recorded in each prescribed revenue account and prescribed subsidiary record categories thereof to the extent that each is separately identifiable in the settlement process. It is not intended that settlement amounts be allocated or generally spread to the individual revenue accounts where they are not separately identifiable in the settlement process. When the settlement amounts are not identifiable by a revenue account they shall be recorded in Account 5060, Other basic area revenue, 5105, Long distance message revenue, or 5200, Miscellaneous revenue, as appropriate.

• Local Network Services revenues (consisting of: Basic local service revenue; Basic area revenue; Private line revenue; Other basic area revenue or Accounts 5001 through 5060) shall include revenues derived from the provision of service and equipment entirely within the basic service area. That area is defined as the normal boundaries for local calling plus Extended Area Service (EAS) boundaries as they apply to that service. It includes revenues derived from both local private network service and local public network services as well as from customer premises facilities services. Local revenues include associated charges such as one-time service connection or termination charges and secondary features such as call waiting.

• Network Access revenues (consisting of: End user revenue; Switched access revenue; Special access revenue, or Accounts 5081-5083) shall include revenues derived from the provision of exchange access services to an inter-exchange carrier or to an end user of telecommunications services beyond the exchange carrier's network.

• Billing and collections service provided under exchange access tariffs shall be included in the Miscellaneous Revenues Group.

• Long Distance Network Service revenues shall include revenues derived from the provision of services beyond the basic service area, whether message or flat-rate and including public network switching as well as private.

It should be noted that NTC Memorandum Circular No. 8-9-95 makes reference to and expressly adopts, in part, US FCC accounting structure, specifically Part 36 thereof. 13 For revenue under from Core Services, there is a need to distinguish between inbound and outbound service because the tax consequence would be different (i.e., income from outbound core services is subject to OCT while revenue from inbound or local services is subject to VAT).


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subscribers (or customers) as well as to other public telecommunications companies. Mobile Telcos render telecommunications services through wireless system, coursed through nonphysical links such as radio or infrared. Core services principally consist of providing voice-call services, whether local calls, national, or international and whether originating and/or terminating in its system. Section 4.2. Non-core Services.—These are other/derivative services/business activities not specifically required to be authorized or granted under a telecommunications Franchise but which they are not prohibited from performing or pursuing such as: (a) the sale of SIM, handsets, and related gadgets; (b) leasing of facilities and equipment; (c) cash remittance service; (d) electronic cash issuance; (e) phone rentals; and (f) Services to other public telecommunications companies include circuit rentals or the

provision of Bandwidth capacity, among others. Section 4.3. Revenues of Mobile Telcos.—Revenue of Mobile Telcos from core services ordinarily 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 as well as Access Charges paid to them by other PTEs/FAs. Core revenues maybe categorized as follows:

1. Basic Local Service Revenues 2. Interconnection Access Revenues 3. Long Distance Network Revenues 4. Other Service Revenues such as data services which include short messaging service and

multimedia messaging services, among other services that the Mobile Telco using its existing telecommunications network, facilities, or infrastructure is able to perform or render.

Section 4.4. Revenue from Sale of Prepaid Credit.—For purposes of these Regulations, the sale of Prepaid Cards or E-load by a Mobile Telco does not constitute per se a separate class of revenue of a Mobile Telco. While the proceeds of the sale of Prepaid Credit by Mobile Telcos will have to be initially recorded as Revenue from Prepaid Credit or such equivalent account suspense account,14 the same shall thereafter be classified accordingly, depending on the manner that the Prepaid Credits was ultimately used. Thus, Revenue from Prepaid Credit may ultimately be recorded as Basic Local Service Revenue if used by the subscriber for voice calls or Miscellaneous (Non-Core) Revenues for the amount of the Prepaid Credit that is simply allowed to expire instead of being used to avail of telecommunications services. Thus, the sale of Prepaid Card or E-load is just a mode of collecting payments for the 14 A "suspense" account is a separate category of account code opened to record (expenditure and/or) income which, for the time being at least, cannot be properly allocated to a specific (budget related expenditure or) income account code. By definition, entries in suspense accounts are transitional and there is a presumption that there is no adequate authority for any items remaining in suspense over a period of time. For this reason, individual entries in suspense accounts must be capable of identification and balances in suspense must be reviewed regularly to confirm that their retention in suspense is justified. (www.scotland.gov.uk/Topics/Government/Finance/spfm/suspense, as viewed on 19 October 2006)


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http://www.scotland.gov.uk/Topics/Government/Finance/spfm/suspense


ultimate services that Mobile Telco may render to a subscriber, whether these are core or non-core services.

For tax purposes, income from Prepaid Card and E-load shall, as hereinafter provided, be recognized at the time of sale thereof rather than at the time of the performance of any service which may be availed using the Prepaid Credit purchased. Section 4.5. Revenue Characterization.—A Mobile Telco’s revenues may be characterized as either originating from — 1. Sale of goods – e.g., sale of handsets including accessories; or

2. 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, and value added services, etc.

Sale of Prepaid Credit at the level of the Mobile Telcos should be considered as sale

of the underlying services and not as sale of goods. On the other hand, the transaction between the Mobile Telcos and Prepaid Load Dealers who directly deal with the Mobile Telcos may either be in the nature of outright sale or a mere sales agency, depending on the actual nature of the relationship between them. Unless the contrary is proven, the transaction between them shall be deemed as constituting an outright sale of Prepaid Credits such that the Prepaid Load Dealers are assumed to acquire ownership of or title over the Prepaid Credits and thereby have the right to sell the same as principals rather than as mere selling agents of the Mobile Telcos.

If Prepaid Load Dealers purchase Prepaid Credits from Mobile Telcos and sell the

same to the public/other Prepaid Load Dealers under their own official receipts/account, then they shall be deemed as engaged in the sale of tangible assets, notwithstanding the fact that what is being purchased with every purchase of Prepaid Credits is the underlying telecommunications service that a subscriber is able to avail. This assumption is inevitable considering that Prepaid Load Dealers themselves who are in the business of selling Prepaid Credit are not themselves engaged in the sale of the underlying service and they are not in the position to recognize income therefrom only at the time the service is actually rendered to the buying subscriber or expires owing to the fact that they do not have the means to monitor actual usage of the Prepaid Credits to avail of telecommunications service. Necessarily, Prepaid Load Dealers selling Prepaid Credits have to record revenue from their transaction at the time Prepaid Credit is sold by them.15 15Admittedly, there is here a deviation from our position that the sale of Prepaid Credit is a sale of the underlying service. While we maintain this position with respect to sale of Prepaid Credit by the Mobile Telcos, it is difficult to similarly treat the sale of Prepaid Credit by Prepaid Load Dealers to other Prepaid Load Dealers or to subscribers in the same manner for reasons already stated in the provision. The overriding consideration here is administrative feasibility and skirt practical difficulties of adopting the position that the sale of Prepaid Credit by Prepaid Load Dealers should be characterized as sale of the underlying service. Thus, this is not in disregard of the opinion expressed by Justice Melencio-Herrera in her dissent in the case of CIR vs. British Overseas Airways Corporation (GR No. L-65773-74, April 30, 1987), which reads in part, as follows: The phrase “sale of airline tickets,” while widely used in popular parlance, does not appear to be


14


On the other hand, Prepaid Load Dealers may earn revenue sourced from the

performance of service rather than the sale of tangible property. Their remuneration from the sale of Prepaid Credits is not therefore profit from sale but compensation for service rendered, i.e., commission, whether referred to as such or as discount or some other term. If the sale of Prepaid Credit by Mobile Telcos is done through Prepaid Load Dealers acting as mere selling agents of the Mobile Telco, then the gross revenue to be reported by the Telco shall be the gross selling price of the Prepaid Load Dealer(s) subject to a corresponding recognition of commission expense or a sales discount. In this case, the Prepaid Load Dealer shall not take title over the Prepaid Credits being sold. Whether or not the relationship between the Mobile Telco and a Prepaid Load Dealer is one of buyer-seller or principal-agent, will have to be established from the underlying contract between the parties as well as the substance of their relationship. A Prepaid Load Dealer dealing with a Mobile Telco claiming to be a mere agent of Mobile Telco and earning commission revenue from the latter shall obtain a certification of such fact from the Mobile Telco. Without a corresponding certification from the Mobile Telco that a Prepaid Load Dealer is its selling agent and that it records the gross sales of such Prepaid Load Dealer in its books subject to a corresponding claim for commission expense, a Prepaid Load Dealer cannot claim to be a mere commission agent. Section 5. Treatment of Various Types of Revenues for Income Tax Purposes.— Section 5.1. Timing of Recognition of Income from Prepaid Credit – The acceptability of reporting income on accrual basis for income tax purposes, notwithstanding, Provided— (a) the Mobile Telco does not cease to be a going concern and (b) the Prepaid Credits were purchased with no definite right on the part of the purchaser of said Prepaid Credit to refund or categorical policy on the part of the Mobile Telco allowing the refund of purchased unused Prepaid Credit, the payment received from the sale of said credits should already be deemed earned and reported for income tax purposes. Thus, revenue of Mobile Telcos from the sale of Prepaid Credit, whether through Electronic Loading or sale of Prepaid Cards, shall be recognized as income at the time the sale is made.16 correct as a matter of tax law. The airline ticket in and of itself has not monetary value, even as scrap paper. The value of the ticket lies wholly in the right acquired by the “purchaser”—the passenger—to demand a prestation from BOAC, which prestation consists of the carriage of the “purchaser” or passenger from one point to another outside the Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC and the passenger. X x x.” In other jurisdictions, the sale of Prepaid Credits is not being categorically characterized as sale of tangible assets but the fact that it is increasingly being taxed at the point of sale is indicative of the intention to characterize it more as a sale of tangible goods rather than as a sale of the underlying service. Lastly, since Prepaid Load Dealers sell Prepaid Credit under their own account (for example, they issue their own official receipts for the entire purchase price) or in the concept of reseller, then their relationship vis-à-vis the Mobile Telcos is that of buyers rather than commission agents. In fact, Mobile Telcos do not book commission expense for the revenue realized by Prepaid Load Dealers. 16 New York: Tax imposed when prepaid phone services sold rather than when call made, State Tax Review, February 22, 2000: Recent statutory changes imposing New York sales and use tax on sales of prepaid


15

http://www.findarticles.com/p/articles/mi_qa3646


http://www.findarticles.com/p/articles/mi_qa3646/is_200002


Revenue from Prepaid Credits shall, upon use or expiration, be properly reclassified

into the appropriate revenue account, depending on the manner that the same were used by the subscribers.

Section 5.2 Access Charges/Interconnection Revenue and Expense. – 1. Timing of Recognition of Access Charge Expense/Revenue. Both inbound (i.e.,

Access Charge revenue) and outbound (i.e., Access Charge expense) Access Charge shall be recognized on accrual basis at the rates stipulated in the applicable interconnection agreements and based on actual volume of traffic monitored by the Mobile Telco from its switch. Thus, income is recognized and reported as such upon the performance of the service, regardless when payment is actually received. The initial recognition of the revenue/expense shall be based on the basis of records available to the Mobile Telco, such as, information gathered from its own switches, until the adjusted figure is determined in the course of the Settlement Process with the other PTE/FA concerned.

2. Recording of Access Charge Expense.

a. Revenue from telecommunications services rendered, assuming the same has interconnection fee component due to another PTE shall be recorded as follows:17

Books of Originating TelcoBooks of Telco of

Termination/InterconnectionTo accrue incomeA/R from Subscriber 100.00 Access charge receivable – PTE 50.00 Access charge expense -PTE 50.00 Access charge revenue

- PTE 44.64

Deferred Input Tax 5.36 Deferred Output 5.36 telephone calling services (Chs. 649 (S.B. 3354) and 651 (S.B. 6170), Laws 1999, effective March 1, 2000) are explained. Tax is imposed when services are sold rather than when a phone call is made. Tax is imposed even if a calling card is not provided at the time of sale. Service time added to a card (recharging) also is subject to tax at the time of sale. Under prior law, tax was imposed when a call was made. Arkansas: Prepaid telephone calling cards taxable, State Tax Review, June 14, 1999: Effective July 1, 1999, sales of prepaid telephone calling cards or prepaid authorization numbers and the recharge of such cards or numbers are subject to Arkansas gross receipts (sales) and compensating (use) tax. Xxx The taxable situs of sales of prepaid calling cards and authorization numbers is at the point of sale by the retail vendor. However, if the sale or recharge does not take place at the vendor's place of business, it is treated as occurring at the customer's shipping address or, if not shipped, then at the customer's billing address or the location associated with the customer's mobile telephone number. Louisiana: Prepaid telephone calling cards subject to tax, State Tax Review, August 10, 1998: The sale of a prepaid telephone calling card or prepaid authorization number is subject to Louisiana sales tax at the rate of 3%. However, telecommunication services paid for in advance by the purchase of a prepaid telephone calling card or prepaid authorization number are not taxable services. 17 Requires telcos to accumulate data on the amount of interconnection expense being incurred which in turn is income of another telco. Presently, there is no interconnection expense in the books of the paying telco that is accumulated since interconnection charges are automatically deducted or netter out from revenues, thus, BIR does not have any available data to enable it to cross check or verify the correctness of the amount being reported by the telco receiving such interconnection revenue.


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VAT Revenue – Voice

Call 89.28

Deferred Output VAT

10.72

Access charge payable-PTE

50.00

Upon payment to PTE and receipt of the VAT receipt from PTE, the recording shall be as follows: Access charge payable-PTE 50.00 Cash 49.10Input Tax 5.36 Deferred Output VAT 5.36 Cash 49.10 Creditable Withholding Tax .90 Deferred Input Tax 5.36 Output VAT 5.36 Withholding Tax

Payable .90 Access charge

receivable-PTE 50.00

Upon receipt of payment from subscriber: Cash 100.00 Deferred Output VAT 10.72 Cash 100.00 Deferred Input Tax 10.72 Adjustment necessary if subscriber is a prepaid subscriber: Prepaid Credit Revenue 89.28 Output VAT 10.72 Revenue – Voice Call 89.28 Prepaid VAT 10.72 Adjustment necessary if subscriber is a prepaid subscriber: Prepaid Credit Revenue 89.28 Output VAT 10.72 Revenue – Voice Call 89.28 Prepaid VAT 10.72

b. Revenue from telecommunications services rendered consisting of outbound communication shall be recorded as follows:

Books of Originating Telco Books of FATo accrue income A/R from Subscriber 100.00 Access charge

receivable – FA 80.00

Access Charge Expense - FA

80.00 Access charge revenue - PTE

80.00

Revenue – Voice Call 90.90


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Deferred OCT 9.10 Access charge

payable-FA 80.00

Upon payment to FA, the recording shall be as follows: Access charge payable-FA 80.00 Cash 80.00 Cash 80.00 Access charge

receivable-FA 80.00

Upon receipt of payment from subscriber: Cash 100.00 Deferred OCT 9.10 A/R from Subscriber 100.00 OCT Payable 9.10 Adjustment necessary if subscriber is a prepaid subscriber: Prepaid Credit Revenue 89.28 Output VAT 10.72 Revenue – Voice Call 89.28 Prepaid VAT 10.72

c. Revenue from access charge from an FA

(i) upon accrual

Access Charge Receivable - FA

100.00

Access Charge Revenue - FA

100.00

(ii) upon payment Cash 100.00 Access Charge

Receivable - FA 100.00

3. Recognition of Gross Amount.—The estimated share of the other PTE/FA for the

interconnection made to or through its network should form part of reported gross revenue of the originating/collecting Mobile Telco; however, simultaneous with the accrual of the gross revenue, the Mobile Telco shall recognize the corresponding interconnection fee expense and set-up the liability for the same amount due to the other PTE/FA. Likewise, the PTE entitled to Access Charge shall book and report as taxable income its estimated revenue from Access Charge upon performance of the service, regardless when the same is ultimately settled.


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4. Adjustments to Revenue from Access Charges. The Settlement Process which is bound to result to adjustments in the accruals made by the Mobile Telco as well as the other PTE (due to discrepancies between the traffic volume per the Mobile Telco’s records and per records of other PTE/FA) shall be completed strictly within the period provided under NTC Memorandum Circular No. 14-7-2000, as may be amended from time to time. The Mobile Telco is allowed to reflect the adjustments resulting from the Settlement Process in the quarter immediately following the quarter the Settlement Process is completed or is required to be completed, whichever is earlier. Mobile Telcos shall keep a record of the details of the reconciliations and other bases of adjustments made in the course of settlement of Access Charges as these may be requested in the course of audit.

5. Use of estimates. For purposes of interim financial statements and tax compliance during

the year, interconnection revenue of Mobile Telcos may be based on estimates considering that these compliance requirements are required to be submitted prior to the 60-day deadline for the issuance of billings for interconnection charges imposed by the NTC. However, the audited annual financial statement and the annual income tax return of Mobile Telcos, shall be required to report the actual amounts based on billings issued, in lieu of estimates.

6. Withholding Tax on Access Charges. To the extent that the Mobile Telco paying

Access Charge to another PTE is among the top 10,000 taxpayers, the remitting/paying Mobile Telco shall subject the same to withholding tax at the applicable rates prescribed under Section 2.57.2(M) of Revenue Regulations 2-98, as amended. If the settlement is accomplished in full or in part by way of offset, the withholding tax shall be computed on the gross amount before offsetting is made. Offsetting between PTEs with respect to Access Charges shall not in any way affect the obligation of the paying PTE to remit the corresponding withholding tax on the gross Access Charge. Withholding of expanded creditable withholding tax on Access Charge shall accrue upon the actual or constructive payment of the Access Charge to the other PTE.

Access Charge due from a Mobile Telco to an FA represents revenue from

services performed outside of the Philippines. Accordingly, it is not taxable in the Philippines and is similarly exempt from withholding tax.

Section 5.3. Policy Against Offsetting/Netting-off for Financial Reporting Purposes.— Mobile Telcos shall report their revenues at their gross amounts, i.e., inclusive of interconnection/access revenues and any amount that may be due to a third party pursuant to a fee sharing agreement. For financial reporting/recording purposes, outright segregation, automatic netting-out, or set-off of payments due to other PTEs/FA/other third parties from the gross revenue of the collecting Mobile Telco is not allowed.

Nothing under these Regulations, however, shall be interpreted as disallowing the

enforcement of contractual stipulations providing for automatic settlement of interconnection charges by way of set-off.


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Section 5.4. Reporting of Direct Costs.— Direct costs that serve to offset gross revenue should be separately reported by Mobile Telcos and shall include outbound Access Charge and the fee share of Content Providers. Costs shall likewise be classified in accordance with the interconnection expense accounts prescribed under the NTC Chart of Accounts.18

Gross revenues shall have corresponding subsidiary revenue accounts, classified in accordance with the Chart of Accounts of the NTC. Subsidiary accounts shall likewise be maintained for items qualifying as operating expenses which are deductible from Gross Revenue.

18 The NTC Chart of Accounts include: Interconnection Access Expense – International; Interconnection Access Expense-National; Interconnection Access Expense-Local Network; Interconnection Access Expense-Cellular Mobile Service; and Interconnection Access Expense – Others, indicating that interconnection expense is supposed to be accumulated and will be reported as an item of operating expense to be offset against gross revenue. This accounting practice of separately reporting interconnection expense rather than directly netting out the same from reported gross revenue is evident in various financial statements of telcos available in the internet and is categorically the prescribed treatment in regulations of countries such as those of Canada.

Moreover, this is consistent with the definition of Gross Receipts under RA No. 9337, which reads: “The term ‘gross receipts’ means 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 advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax.” This is also consistent with the definition of “gross receipts” under Revenue Regulations No. 16-2005 as amended by RR No. 4-2007, which reads: “SEC. 4.108-4. Definition of Gross Receipts. – ‘Gross receipts’ refers 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 applied as payments for services rendered and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding the VAT, except those amounts earmarked for payment to unrelated third (3rd ) party or received as reimbursement for advance payment on behalf of another which do not redound to the benefit of the payer. A payment is a payment to a third (3rd) party if the same is made to settle an obligation of another person, e.g., customer or client, to the said third party, which obligation is evidenced by the sales invoice/official receipt issued by said third party to the obligor/debtor (e.g., customer or client of the payer of the obligation). An advance payment is an advance payment on behalf of another if the same is paid to a third (3rd) party for a present or future obligation of said another party which obligation is evidenced by a sales invoice/official receipt issued by the obligee/creditor to the obligor/debtor (i.e., the aforementioned “another party”) for the sale of goods or services by the former to the latter. For this purpose ‘unrelated party’ shall not include taxpayer’s employees, partners, affiliates (parent, subsidiary and other related companies), relatives by consanguinity or affinity within the fourth (4th) civil degree, and trust fund where the taxpayer is the trustor, trustee or beneficiary, even if covered by an agreement to the contrary.

Since third parties such as Content Providers who have fee-sharing arrangements with a Mobile Telco as well as other carriers with interconnection agreements with the Mobile Telco do not issue receipts or invoices separate and distinct from those issued by the Mobile Telco to its subscribers, then fees due to other carriers and to parties to fee-sharing arrangements are not within the exception provided in the RR definition of “gross receipts”. See also KPMG discussion of IFRS accounting in the Telecommunications Industry.


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Section 5.5. Recognition of Revenue from Postpaid Subscribers.—The billing statements of Mobile Telcos would ordinarily reflect the following revenue components:

1. Fixed monthly subscription fee; 2. Charges for Calls and SMS not included in or beyond the free credits included with the

fixed monthly subscription fee, depending on the billing policy of the Mobile Telco such as charges for international calls and international text messaging; and

3. Charges for value-added services such as download of content-based services through GPRS/3G.

Telecommunications services provided to postpaid subscribers are billed throughout

the month according to the bill cycles of subscribers. As result of bill cycle cut-off, monthly service revenues earned but not yet billed at the end of the month are estimated and accrued. These estimates should be based on actual usage using historical ratio of consumable over billable usage. Section 5.6. Recognition of Revenue from the Sale of Prepaid Credits.—In general, Mobile Telcos shall recognize revenue from Prepaid Credit equivalent to the proceeds of the sale, less the VAT component thereof; however, if the Mobile Telcos sell through commission agents, the gross selling price of such commission agents less the VAT component thereof shall be recorded as its revenue from the sale of Prepaid Credit, subject to the Mobile Telco’s right to claim deduction for commission payments to its commission agent Prepaid Load Dealers. Any commission expense or discount extended to Prepaid Load Dealers as their compensation for the sale/distribution of the Prepaid Credits for a Mobile Telco shall not be netted out or automatically deducted from the gross revenue to be reported by Mobile Telcos. In the interest of transparency of the cost and revenue components of Mobile Telco operations, no outright set-off or netting out shall be allowed.

If the Mobile Telco treats a particular Prepaid Load Dealer as its commission agent, then it shall be its obligation to withhold tax on the commission revenue paid at the rate prescribed under Section 2.57.2(R) of Revenue Regulations No. 2.98, as amended. Section 5.7. Revenue from the Sale of SIM Packs (Bundled or Unbundled).—Proceeds of the sale of SIM packs if the same includes air time credits shall be allocated accordingly. Airtime credits sold and bundled with the SIM pack shall be recorded in the same way as sale of prepaid airtime credits while the sale of SIM shall be recorded as sale of goods.

Section 5.8. Revenue Subject to Fee Sharing Arrangement with Content Providers.— Consistent with Sections 5.3. and 5.6 above, revenue from services subject to fee sharing arrangement with third party Content Providers shall be reported at their gross amount by Mobile Telcos, or inclusive of the revenue share of the Content Provider, subject, however, to the right of the Mobile Telco to claim the corresponding content fee equivalent to the share of the Content Provider from the service sold by Mobile Telco as an integral component of its direct costs.


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Income remittances of Mobile Telcos to Content Providers shall be subject to withholding tax at the rate of two percent (2%), in accordance with Section 2.57.2(M) of Revenue Regulations No. 2-98, as amended. Only fees payable to duly licensed Content Providers pursuant to NTC Memorandum Circular No. 03-03-2005-A (Amendment to the Rules and Regulations on Broadcast Messaging Service dated March 15, 2005) shall be allowed to be claimed as part of the direct costs of Mobile Telcos. Payments pursuant to fee-sharing arrangements with unlicensed Content Providers shall be disallowed as a component of direct cost as well as deductible business expense. Section 5.9. Treatment of Income from Remittance Services.—Service fees collected from performing remittance services shall be considered as non-core revenue and in no case therefore shall they become subject to OCT, notwithstanding the fact that the remittance is outbound. The receipt of the amount sought to be remitted shall only be acknowledged by the Mobile Telco or its remittance partner by way of an acknowledgment or remittance receipt. It shall only cover with its own official receipt that portion pertaining to its service fee. The same rule shall apply to remittance partners of Mobile Telcos. However, the latter shall not only issue a receipt for the amount of its share of the service fees but the entire service fees, including such portion payable to the Mobile Telco. The third party remittance partner of Mobile Telcos shall, however, be allowed to deduct the Mobile Telco’s share of the service fees as part of its deductible direct costs.

Service fees collected abroad by remittance partners of the Mobile Telcos shall not be subject to Philippine VAT and the share of Mobile Telcos therefrom remitted to the Philippines shall likewise be deemed zero-rated to the extent that it constitutes fees for services to be rendered locally for a non-resident and the same is paid for in foreign currency accounted for in accordance with the rules of the Bangko Sentral ng Pilipinas (BSP).

Section 5.10. Treatment of Income from E-money Issuance.—Service fees earned from the issuance of E-money shall be separately accounted for and proceeds thereof shall constitute income from non-core services. As in the case of remittance service, money given in exchange for the E-money issued by the Mobile Telco shall be evidenced by an acknowledgment receipt while the service fees collected from performing this service shall be receipted accordingly, as any other income of the a Mobile Telco. Only the amount received in payment for the service fees, as duly receipted, shall be reported as income by the issuing Mobile Telco and subjected to VAT.

Should Mobile Telcos earn by way of discounts from settlements made to merchants accepting E-money issued by the Mobile Telco as payment for their services/merchandise, such income earned by Mobile Telcos shall likewise be classified as non-core service income. Settlement of the cash equivalent of e-money issued by Mobile Telcos accepted as payment by merchants shall be subject to the same rules applicable to settlement payments of credit card companies to merchants, specifically the withholding tax thereon prescribed pursuant to Revenue Regulations No. 2-98.19

19 Section 2.57.2(L) Revenue Regulations No. 2-98.


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Cash receipts of Mobile Telcos and their agents shall not be deemed as pertaining to the purchase of Prepaid Credits if the credits purchased are represented to be acceptable as payment for goods and services purchased from/supplied by undefined number of merchants which are not necessarily controlled or linked to the mobile operator. E-money may be used to pay for Prepaid Credits but shall not be immediately available for use to avail of telecommunications services in the same manner as Prepaid Credits. Mobile telcos issuing E-money shall maintain separate books for this particular business activity.

Unless the Mobile Telco can categorically prove that the money or payment received

does not pertain to a purchase of Prepaid Credits or if the E-money issued can directly be used to avail of telecommunications services without having to purchase Prepaid Credits, the entire cash payment received shall be treated as revenue from the sale of Prepaid Credits rather than treated as receipt in connection with E-money issuance.20

20It is noted that in certain jurisdictions, there is already technology that allows a single prepaid card issued by a telco to be used for various uses (multi-use card). A transaction is deemed to be an e-money if there is a clear trilateral relationship between the user, mobile operator, and merchant. However, whether or not the transaction is an e-money transaction or a mere use of the prepaid card for direct transaction/sale of goods and services by the telco, it is proposed the specific business model adopted should be analyzed: In practice, there are different business models depending on the nature of the content and the presentation of the offered product/service. Five examples are provided below in simplified terms. a) A mobile operator offers content to its customers via a “portal” without specifying the origin of the content. Therefore, the product/service belongs to the mobile operator itself, or it is re-sold and supplied by the mobile operator, or it is sold and/or supplied by a third party but without any information to the customer. In practice, the purchase is made using the portal as a catalogue. In this example the customer has only one counterparty: the mobile operator. The e-value is spent to buy something presented as an ancillary product / service of the mobile operator. b) A mobile operator offers its customers content through a “portal” and it is clearly apparent that some products or services are produced and/or supplied by third parties. However, the mobile operator appears as “the seller” to the customer. In this context, the payment is likely to be made to the mobile operator in exchange of what appears one of its ancillary services. Again, there is no question of e-money, because the card is not used as a real multi-purpose card (intended also to pay third parties). It will also be interesting to assess who is responsible for the product / service in case of default, error in delivery etc. More details on these arrangements could clarify if, despite the technical arrangement adopted to sell the product/service, the content must be considered as sold by the third party and this third undertaking is the real counterparty. c) A mobile operator offers content through a “portal”, and where certain products or services are clearly produced, supplied and sold by third parties. In this context there are three visible actors and the card is likely to be used as a real multi-purpose card. The mobile operator appears as mere “carrier” of communications or of the digital content, if any. d) Access to services through a channel other than the mobile operator’s portal. The customer may call a specific phone number or connect himself to a web page, and make his purchase via voice-call, SMS, or web message. In this case, the mobile operator appears as a mere technical intermediary for the communication allowing the order and the delivery of the content on the handset (examples: logos, screen savers, games, news, horoscope, music, ring tones, videos, etc).


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Section 5.11. Treatment of Activation/Deactivation Charge.—Activation charge shall be recognized in full as income by a Mobile Telco upon receipt of payment or billing thereof, whichever is earlier. Deactivation charge, if any is charged by a Mobile Telco, shall be recognized as income on accrual basis. Section 5.12. Treatment of Revenue from Roaming Charges.—

a. In-collect Roaming Charges shall not be treated as revenue of the Mobile Telco as the

Mobile Telco has no participation in the performance of the service being paid for, as in fact, the Mobile Telco only earns from such transactions in the form of the administration fee/surcharge that it is collecting, usually computed as a percentage of the amounts charged and payable by the FA servicing the Mobile Telco subscriber while the subscriber is outside of the service area of his Mobile Telco.

b. Out-collect Roaming Charges shall be treated as revenue of the Mobile Telco as soon as

the service has been rendered.

c. Surcharge or administration fee shall be recognized as revenue at the same time that the amount due to the FA is recorded in the books of the Mobile Telco.

Estimates may be resorted to for purposes of determining the income payable to or from the FA, making use of the records available to the Mobile Telco and applying the terms and conditions of the roaming agreements with the FAs concerned.

Section 5.13. Treatment of Revenue from Sale of Phone Units.—The treatment of proceeds from sale of handsets, phone kits, SIM packs and other phone accessories shall depend on whether the sale constitutes a straight sale or it is subject to terms and conditions linked with the provision of telecommunications service to the buyer.

In this case, as in the case described sub c), as well as for the exception described sub b), there are three visible actors: a customer (purchaser), a merchant (seller and supplier of the content) and the mobile operator (technological intermediary for this new form of e-commerce). The pre-paid card becomes a multi-purpose card and its-value is used to pay a provider other than the issuer. The requirements of the E-money Directive will be met. e) Finally cases exist where mobile operators are themselves in no doubt that the e-value used as mean of payment is de facto e-money. For example, a customer may dial a phone number and pay for a parking space; buy a soft drink from a vending machine or orders a CD or a pizza to be delivered at home. In these cases there is no confusion or overlap between the communication service and the product / service paid, or the origin of the product or service, neither by the customer nor by the phone company. There is no conceptual difference between this last example and that described sub c) and d), apart from the fact that the content is completely separated from the communication device and related services (where in the previous cases it is delivered on the handset). Therefore, also the schemes described sub c) and d) should be considered as fulfilling all the basic requirements to be an e-money transaction.


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(a) Straight Sale – Revenue from the sale of a unit outside any promotional offer or without any lock-up period or subscription obligation from the Mobile Telco selling the same shall be treated as any other revenue from the sale of goods. The related costs of handsets, phone kits, SIM packs and accessories sold to customers are recorded as “Cost of Sales” in income statement of the selling Mobile Telco.

(b) Sale Subject to Lock-up Period –

1. At a discount – if the unit is sold at a discount, i.e., below cost, such discount shall not be eligible for one-time deduction but shall be allocated accordingly over the lock-up period as marketing expense if the lock-up period exceeds one (1) year. If the lock-up period does not exceed one (1) year, the discount extended may be charged as outright expense in the period when availed by the Mobile Telco’s subscriber.

2. At no discount but on installment basis – if the unit is sold on an installment basis at

no additional cost or charge for availing of the installment plan, the sale of the unit may be treated similarly as a straight sale unless the Mobile Telco elects to report its income from such transaction in accordance with Section 49(A) of the NIRC. If there is a mark-up on the installment price compared to the price on a straight sale basis, then the difference shall be treated as other income.

3. At no additional consideration – if the telephone unit is given for free, subject

however to the agreement of the subscriber to a lock-up period, the cost of the telephone unit shall be recorded as marketing expense but subject to amortization over the term of the lock-up period. There shall be no allocation of the monthly subscription revenue between recovery of the cost of the unit and revenue from sale of services, considering that subscribers availing of such free phone unit promo are able to avail of the same benefits as any other subscriber under the same monthly subscription rate who have not availed of the promo, indicating that such subscriber stands to benefit to the full extent of his monthly subscription.

Section 5.14. Treatment of Peer-to-Peer Reloading/Loading.—Transfer of load from one prepaid subscriber to another shall not result in the recognition of income at the time of the transaction and neither shall it be deemed as use of such load credits, notwithstanding the fact that it shall reduce the Prepaid Credit of the prepaid subscriber transferring such Prepaid Credit. As provided above, Mobile Telco shall recognize income from the sale of Prepaid Credit at the point of their sale, regardless of the actual use thereof. The manner in which the Prepaid Credit was used by the recipient shall only determine the specific revenue account to which the Prepaid Credit Revenue previously recorded shall be reclassified.

If the subscriber transferring airtime load is a postpaid subscriber, the value of the airtime credits transferred may or may not result in additional revenue to the Mobile Telco, depending on the terms of the subscription plan of the transferring subscriber. In case the transferred load is beyond the inclusions in the fixed monthly fee of the


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subscriber, the Mobile Telco shall reflect the corresponding charges on the billing statement of the subscriber and the same shall be recorded as revenue by the Mobile Telco at the time revenue from Postpaid Subscriptions are ordinarily accrued.

In any case, the subsequent use of the load obtained by a subscriber from peer-

to-peer loading shall no longer constitute a revenue-generating transaction for the Mobile Telco, for tax purposes. Section 5.15. Treatment of Deposits.—Deposits required from a subscriber before he is allowed to avail of certain services shall not be reported as revenue nor as gross receipts for VAT purposes until and unless the same has been applied towards the payment of actual charges incurred by the subscriber. The forfeiture of a deposit may therefore constitute revenue or may be recorded as a collection of a liability that the subscriber incurred. Accordingly, it may be recorded as an offset against a liability account rather than recognized as revenue of the Mobile Telco. Section 6. Treatment of Various Types of Revenues for VAT/Overseas Communications Tax (OCT) Purposes.— Section 6.1. Zero-rated and VAT-exempt Transactions.—Gross receipts of Mobile Telcos may be subject to VAT at the regular 12% rate or at 0%, or exempt from VAT but subject to OCT imposed under Section 120 of the NIRC. More specifically, gross receipts of Mobile Telcos shall be taxed as follows:

1. In view of the provisions of Sections 120, 108 and 106 of the NIRC, only the following

shall not be subject to VAT:

(a) amounts earmarked for payment to FAs for their share of services performed outside of the Philippines;

(b) gross receipts subjected to OCT, unless the Mobile Telco has elected to register such activities subject to OCT as part of its VAT-registered operations pursuant to Section 109(2) of the NIRC in lieu of OCT;

(c) Deposits for telephone instruments to the extent that the same have not been applied towards the payment of Mobile Telco charges/fees; and

(d) those qualifying under Section 109 of the NIRC as exempt transactions. 2. VAT Zero-rated Transactions:

(a) export sales of SIM cards, telephone equipment, and other gadgets; (b) sales of goods and services to zero-rated entities, e.g. PEZA and those exempt from

indirect taxes under special laws; and (c) services rendered to nonresident clients paid for in acceptable foreign currency such

as Access Charges and Out-collect Roaming Charges from FAs due to Mobile Telcos. Section 6.2. VAT Base.—Gross receipts of Mobile Telcos subject to VAT shall be computed on the basis of Gross Receipts, as the term is defined under Revenue Regulations No. 16-


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2005, as amended.21 ‘Gross receipts’ refers 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 applied as payments for services rendered and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding the VAT, except those amounts earmarked for payment to unrelated third (3rd ) party or received as reimbursement for advance payment on behalf of another which do not redound to the benefit of the payer.

A payment is a payment to a third (3rd) party if the same is made to settle an obligation of another person, e.g., customer or client, to the said third party, which obligation is evidenced by the sales invoice/official receipt issued by said third party to the obligor/debtor (e.g., customer or client of the payer of the obligation). An advance payment is an advance payment on behalf of another if the same is paid to a third (3rd) party for a present or future obligation of said another party which obligation is evidenced by a sales invoice/official receipt issued by the obligee/creditor to the obligor/debtor (i.e., the aforementioned “another party”) for the sale of goods or services by the former to the latter.

For this purpose ‘unrelated party’ shall not include taxpayer’s employees, partners, affiliates (parent, subsidiary and other related companies), relatives by consanguinity or affinity within the fourth (4th) civil degree, and trust fund where the taxpayer is the trustor, trustee or beneficiary, even if covered by an agreement to the contrary.

Accordingly, on the basis of the foregoing— A. Inclusion of Fees Due to VAS/Content Provider

Considering that VAS/Content Providers do not issue official receipts to the subscribers of Mobile Telcos, gross receipts arising from services subject to revenue sharing arrangements between Mobile Telcos and VAS/Content Providers will have to be subjected to VAT at the level of the Mobile Telco at their gross amount, i.e., prior to the deduction of the share of the VAS/Content Provider entitled to a share in the fees collected by the Mobile Telco. Mobile Telco shall consider 12% of the share of the VAS/Content Provider as input VAT if the latter is VAT-registered and the input VAT can be substantiated by a VAT official receipt issued by such VAS/Content Provider.22

21 Specifically, see amendment pursuant to Revenue Regulations No. 4-2007. 22 Even under RMC No. 5-96, it appears that fee share of third-party content/VAS providers would not qualify for exclusion from the VAT base, as it reads:

Q-6 What is gross receipts for purposes of franchise grantees subject to VAT? A-6 For purposes of franchise grantees subject to VAT, gross receipts, as defined under Revenue Regulations No. 7-95, 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 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


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The gross amount of the VAS/Content Provider’s share in the fees shall be

recorded accordingly by the VAS/Content Provider to reflect the gross sales as well as the output VAT component thereof. Accordingly, on the sale of content/VAS, VAT shall be imposed both at the level of the VAS/Content Provider and the Mobile Telco, provided, however, that corresponding input tax may be claimed by both the Mobile Telco and the VAS/Content Provider.

B. Inclusion of Access Charges Due to Other PTEs/FAs

Interconnection settlements/charges, unless specifically exempt from VAT or subject to 0% VAT, as indicated in Section 6.1 above, shall be treated in the same way as the share of third-party VAS/Content Providers under fee sharing arrangements, as discussed above, to the extent that the requirement for purposes of exclusion from “Gross Receipts” as imposed in Section 4.108-04 of Revenue Regulations No. 16-2005, as

another telecommunications company; 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 118, Title V of the NIRC. Q-7 What portion of their gross receipts is not subject to VAT? A-7 a. The share of the foreign telecommunications administration (FA) in the payment received by a local telecommunications company from its customers in accordance with their agreement is not subject to VAT because the related services are performed by FA outside the Philippines. The telecommunications company shall not charge VAT on the FA's share. In billing customers, the local telecommunications company shall present the FA's share separately with a notation that it is VAT exempt. The FA's share may be presented on the same VAT invoice or official receipt showing the telecommunications company's other VAT taxable charges. b. 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.

Moreover, the draft RMC for the telco industry following the amendment of the VAT law in 2005, provides:

Question 6 - What are gross receipts for purposes of Telecom services subject to VAT? Answer 6 - For purposes of telecom services 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 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; 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 NIRC (Overseas Communication Tax) unless the Telco elects to subject the same to VAT in accordance with Section 109(2) of the NIRC in lieu of the OCT. 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.

Thus, whether in the previous issuance or in the 2005 draft RMC, there was no indication that the BIR has taken the position that the fee share of third party VAS/content providers, which are generally non-telcos are excluded from “Gross Receipts” for VAT purposes.


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amended, are not likewise satisfied (considering that PTEs/FAs entitled to such Access Charges do not issue official receipts to the subscribers of the paying Mobile Telco).23

Moreover, to the extent that interconnection fee is not due to an “unrelated party”,

as the term is defined in Section 4.108-04 of Revenue Regulations No. 16-2005, the interconnection charge/fee payable by the Mobile Telco shall likewise constitute part of the Mobile Telco’s Gross Receipt subject to VAT.

Section 6.3. Timing of Reporting for VAT.—Gross receipts of Mobile Telcos subject to VAT shall be reported for VAT purposes upon receipt of payment, whether actual or constructive. In case the amount of Access Charge revenue receivable by a Mobile Telco from another PTE has been used to set-off any amounts due from and payable by the Mobile Telco to such other PTE, then payment shall be deemed to have been constructive received. Accordingly, for VAT purposes, the amount applied by way of set-off shall already be reported as part of Gross Receipts of the Mobile Telco for the period when the set-off was made by the paying PTE. VAT is not yet due on interconnection charges otherwise subject to VAT until such is actually or constructively paid to the Mobile Telco.

Revenue from the sale of Prepaid Credit shall likewise be subject to VAT at the time payment for the same is received by the Mobile Telco, irrespective of the period or time when the Prepaid Credit is actually used. Section 6.4. Post-tax Period Adjustment.—Adjustments to the amount of revenue or expense from Access Charges as well as settlements for Roaming Charges declared during the preceding taxable period (month in the case of VAT and OCT and quarter in the case of income tax) shall be posted in the immediately succeeding period after such settlement is

23 Unlike in the case of non-telco third party VAS/content providers, it appears that the BIR was previously of the position that gross receipts “earmarked for payment to another telecommunications company”, in general, are excluded from “Gross Receipts” subject to VAT. It would appear that the quoted clause covers interconnection charges as these are earmarked for payment to another telco. Thus, the proposed wording of current provision may result in a deviation from the original BIR position on this matter but it would be consistent with RR 16-2005 as amended by RR 4-2007. (Refer to immediately preceding footnote for quoted text of previous issuance and proposed 2005 draft RMC.)

A Mobile Telco will generally have gross receipts which represent interconnection fees/charges which are payable to:

a. another local telco, whether Mobile or otherwise; and b. FA for services the FA rendered abroad.

On the other hand, a Mobile Telco will generally have gross receipts representing interconnection fees earned and receivable from:

a. another local telco; and b. FA for services the Mobile Telco rendered locally for the FA.

Both receipts under item (a) are subject to VAT while both receipts under item (b) are NOT subject to VAT. Interconnection fees due to FAs from Mobile Telco are (a) not within the scope of VAT for being rendered outside the Philippines but are subject to OCT for pertaining to outbound international calls; interconnection fees due from FAs to Mobile Telcos on the other hand, are subject to VAT but at 0% for being paid for in foreign currency and rendered for a nonresident.


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made. In any case, all settlement adjustments taken up in the books more than ninety (90)24 days after the roaming or interconnection revenue or expense was recognized in the books of

24 The following provisions of NTC Memorandum Circular No. 14-7-2000 are relevant with respect to the determination of the reasonableness or basis of the period herein provided:

Article VI MEASUREMENT OF CALLS AND COLLECTION OF CHARGES

Section 16. The parties shall measure both outgoing and incoming calls from their respective networks. Section 17. Each party shall undertake the billing and collection of payments for all outgoing paid calls made by its own subscriber or customer and, if agreed upon by the parties, incoming collect calls made by a subscriber of customer of another party. Unless otherwise agreed upon, the billing and collection of payments for outgoing calls made by a subscriber or customer of a party but using the IXC or IGF facility of another party, shall be the responsibility of the party-IXC or party-IGF, as the case may be. Section 18. The parties shall submit to each other settlement statements within sixty (60) days from the end of the month to which the statement pertains. The data required to be included in the statement shall be mutually agreed upon by both parties. In the event a party fails to submit the settlement statement within the said period, any available data for purposes of reconciliation and statement shall be used. The party who failed to submit the data shall have the right to contest or dispute the reconciled data within three (3) months from transaction month. Thereafter, said party shall be barred to dispute the data. If the party with a receivable does not agree with the settlement statements of the other party, it shall send its own reconciliation statement to the latter within sixty (60) days from receipt of the statement. A party with payable balance shall pay all undisputed calls within thirty (30) days from receipt of the billing statement sent by the party with receivable. In cases where the statements of the parties do not reconcile, the following rules shall govern: a. If the variance is four percent (4%) of the amount payable as reflected in the books of the payer or lower, the party with the (payable) balance shall pay the lower of the two amounts reflected separately in the respective reconciliation statement of the parties; b. If the variance is more than four percent (4%) but not more than seven percent (7%) of the amount payable, the party with (payable) balance shall pay the lower of the two amounts reflected separately in the respective reconciliation statements of the parties plus fifty percent 50% of the amount of the variance; c. If the variance exceeds seven percent (7%), the parties shall be given a period of thirty (30) days to settle the dispute. If the parties fail to settle their dispute, the same shall be referred to the Commission for arbitration. d. In cases falling under (a) and (b), payment of the party with a balance shall be made within thirty (30) days from receipt of the reconciliation statement sent by the party with receivable; Provided, that the payment by the party with a balance shall be without prejudice to the right of the party with receivable to collect the remaining balance and for this purpose, the parties shall be given thirty (30) days to settle their dispute. If the parties fail to settle their dispute, the same shall be referred to the Commission for arbitration. The proceedings mentioned in this section shall be summary in nature and the Commission shall resolve the matter within a period of thirty (30) days from the time the same is submitted for resolution. Nothing in this section shall prevent the parties from their settling their disputes among themselves by continuous reconciliation of their statements.


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the Mobile Telco days shall be sufficiently justified and substantiated upon audit to determine whether there is basis to impose surcharge and interest for late reporting of adjustments that prejudiced the Bureau’s effort for timely collection of taxes. Section 6.5. Input VAT.— Mobile Telcos 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 VAT-exempt activity. The manner of apportionment of input tax shall be as provided under Revenue Regulations No. 16-2005, as amended. Section 6.6. Treatment of Deposits for VAT Purposes. Deposits shall be subject to VAT when they become part of Gross Revenue which generally happens when the Deposit is forfeited and applied towards the payment of an account that has not yet been recognized as income/revenue. Thus, if the amount is applied towards the partial or full payment of unpaid accounts, the same shall be considered part of collected revenue and thus, part of the tax base for purposes of computing VAT on the services sold by the Mobile Telco. On the other hand, if the Deposit is applied towards full or partial recovery of the value of the equipment that was leased out but was not returned or was lost, the Deposit may be forfeited and together with any additional payment demanded from the subscriber liable for the loss or damage, shall be deemed as revenue subject to VAT. Section 6.7. VAT on Revenue from Sale of Prepaid Credits.—

A. General/Imposition of Advance VAT. Unless the sale of Prepaid Credits is herein

specifically provided to be subject to 0% VAT or exempt from VAT, the sale of Prepaid Credits by Mobile Telcos shall be imposed VAT consisting of two components, specifically:

1. The 12% VAT due on the Net Proceeds, as defined in Section 5.6 above, and

The VAT due on the Net Proceeds is the regular VAT that is imposed on Mobile Telcos on revenue from the sale of Prepaid Credit.

Section 19. Except as provided in the preceding section, the party with a (payable) balance shall settle the amount due within thirty (30) days after the reconciliation of the statements. Section 20. For International Calls: The collection of payments from the Foreign Administrations for all incoming paid calls and outgoing collect calls shall be the responsibility of the IGF operator that received/sent said international paid calls from/to said Foreign Administration. The parties shall settle the interconnect charges for a particular month within thirty (30) calendar days from receiving the statements also for said particular month from all its foreign correspondents through a toll journal mutually agreed upon by both parties. Within fifteen (15) days from receipt of the toll journal, the party with a payable shall send to the other party a reconciliation statement reflecting the amount computed as payable, otherwise, the toll journal shall be deemed accepted by the party with a receivable. Section 21. The modes of payments including the interests, penalties or surcharges for late payments shall be mutually agreed upon by both parties.


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2. The 12% VAT on the difference between the Load Value and the Net Proceeds, collected in advance (Advance VAT) at the level of the selling Mobile Telco.

The Advance VAT shall represent the estimated VAT that remains payable

after the level of the Mobile Telcos, based on the expected, prescribed, or indicative street value of the Prepaid Credit which in no case shall be more than the Load Value. The Advance VAT shall be charged/billed to and paid in full by the Prepaid Load Dealer dealing directly with the Mobile Telco. The Prepaid Load Dealer charged for the Advance VAT shall have the right to pass on such portion of the Advance VAT as may not be attributable to its own transaction. At each level of distribution or sale of Prepaid Credits after the level of the Mobile Telco shall compute its share of the Advance VAT by multiplying the value-added by the Prepaid Load Dealer concerned by 12%. Any excess of the Advance VAT over a Prepaid Load Dealer’s share of the Advance VAT shall be passed on to the next level Prepaid Load Dealer. A Prepaid Load Dealer’s share of the Advance VAT shall be applied as credit against its VAT payable. The amount of Advance VAT Credit shall be separately indicated on the official receipt issued by the Prepaid Load Dealer seeking recovery of the Advance VAT Credit in excess of its share of the same.

Thus, assuming the Mobile Telco sells Prepaid Credit which has a Load Value

of P100.00 for P80.00 to its major Prepaid Load Dealer (Dealer 1), which in turn sells the same to another Prepaid Load Dealer (Dealer 2) who may either be VAT-registered (Dealer 2-A) or non-VAT-registered (Dealers 2-B) which ultimately sells the Prepaid Credit for P100.00 to a subscriber, the recording shall be as follows:

Books of Mobile Telco

Books of Dealer 1

Sale and Purchase of Prepaid Credit Cash [(P80.00 + (20-20/1.12)] 82.14

28Prepaid Credit 71.428

Prepaid Credit Revenue (P80.00/1.12)

71.428 Input Tax 8.571

Output VAT (P100-P89.28)

8.571 Advance VAT Credit 2.1428

Advance VAT Payable (P100-P80)x1/1.12

2.1428 Cash 82.1428

Book of Dealer 1

Sale of Prepaid Credit by Dealer 1 to Dealer 2 (A/B)

Upon VAT Payment

Cash [(P86.00 + (14-14/1.12)] 87.50 Output VAT 9.214 Revenue (86/1.12) 76.786 Input VAT 8.571


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Output VAT (P86.00 -76.786)

9.214 Advance VAT Credit

.643

Advance VAT Credit (P14-14/1.12)

1.50

Purchase of Prepaid Credit from Dealer 1 by Dealer 2 (A/B)

Books of Dealer 2 (A-VAT) Books of Dealer 2 (B-% Tax) Prepaid Credit 76.786 Prepaid Credit 87.50 Advance VAT Credit 1.50 Cash 87.50Input VAT 9.214 Cash 87.50

Sale by Dealer 2 (A/B) Cash 100.00 Cash 100.00 Revenue 89.286 Revenue 100.00 Output VAT 10.714 Recording of Tax Payment Output VAT 10.714 Percentage Tax 3.00 Input VAT 9.214 Cash 3.00 Advance VAT Credit 1.50 TOTAL TAXES (VAT or VAT + Percentage Tax)

10.714 12.214

INCOME TAX IMPACT 0 (1.05)NET TAX IMPACT 10.714 11.164

B. Local Sale of Prepaid Credit

1. Sale by the Mobile Telco

VAT shall be due upon the receipt of proceeds from the sale of Prepaid Cards or E-load by the selling Mobile Telco. If the Prepaid Credit is subsequently used for telecommunications services subject to OCT instead of VAT, the same shall be addressed in accordance with Section 6.8 of these Regulations. If the Prepaid Credit is paid by way of transfer of value from the E-wallet of a subscriber, the same shall be reported for VAT purposes in the same manner as any sale of Prepaid Credit, i.e., at the time of sale.

Sale of Prepaid Card settled through facilities of Payment Conduits shall

likewise be reported for VAT purposes on the date of actual sale and loading of Prepaid Credits to the account of the buying or beneficiary subscriber, regardless of the date of the actual cash settlement between the Mobile Telco and the Payment Conduit.


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2. Sale by Prepaid Load Dealers

The resale of Prepaid Credit, whether in face-to-face or remote transactions such as through the internet or through a cellphone using online banking, credit card, or electronic money as payment mechanism, shall not be deemed as a sale of service but shall be deemed as sale of goods, as provided under Section 4.5 above, since these Prepaid Load Dealers are not in the telecommunications service business.25 Accordingly, VAT-registered third party resellers of Prepaid Credit shall be liable for VAT upon their sale of Prepaid Credits, regardless of the actual use and manner of use of the Prepaid Credits by the purchaser-subscriber.

Prepaid Load Dealers shall report the gross amount of their Prepaid Credit

sales and at the same time claim as direct cost the corresponding purchase price of the Prepaid Credit sold. Prepaid Load Dealers shall not be allowed to recognize revenue on their sale of Prepaid Credit on the basis of the net amount realized from the purchase and sale unless they are able to substantiate by written contract with the Mobile Telcos or other principal that they are merely commission agents of Mobile Telcos or such other principal. To establish that they are mere commission agents, they shall not be purchasing Prepaid Credits from their principal since as commission agents, they are not supposed to take title over the goods or merchandise sold by them.

B. Foreign Sale

For purposes of these Regulations, foreign sale of Prepaid Credit shall mean the sale of Prepaid Credit outside of the Philippines.

3. Sale by Mobile Telcos

The sale of Prepaid Credit abroad directly by the Mobile Telco shall not be subject to VAT if paid for in foreign currency inwardly remitted pursuant to Section 108(B) of the NIRC and Section 4.108-5 of Revenue Regulations No. 16-2005 provided such Mobile Telco is able to ensure that such Prepaid Credit sold abroad are not subsequently resold in the Philippines. The Mobile Telco should be able to prove that it is able to track/monitor whether the said Prepaid Credits are subsequently and

25 Admittedly, there are 2 schools of thought in this regard: (a) those that consider such transaction as a sale of service considering that when a person buys pre-paid load electronically or through cards, their intention is to purchase the underlying service and not the card or load per se and (b) those that consider the transaction as a sale of goods, since the resellers are not, after all, in the telecommunications business. For tax purposes, the latter is the more practical view considering that resellers will not be able to able to monitor when the service is actually rendered to enable them to determine the timing of their recognition of income from their sale of the Prepaid Credits. Moreover, if the sale of e-load is deemed as sale of the underlying service, then the resellers will also need to monitor whether the load they sold was used for local or outbound telecommunications services to be able to compute how much of their sale is subject to VAT and how much is subject to OCT.


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ultimately sold to its subscribers in the Philippines by the non-resident purchaser.26 Unless the Mobile Telco has such capability, all sales of Prepaid Credit by the Mobile Telco, whether sold in the Philippines or abroad, shall be initially fully subject to 12% VAT. It shall be the burden of the Mobile Telco to prove that prepaid airtime credits sold at 0% VAT were actually consumed abroad. Prepaid Credit sold by the Mobile Telco abroad and therefore, without any VAT should not be allowed to be resold locally by the Mobile Telco and Mobile Telco shall not load such corresponding credit to the local subscriber unless corresponding value is deducted to cover the VAT which was not collected at the time of its original sale of the Prepaid Credit to the foreign reseller. In any case, Prepaid Credit sold, whether subjected to VAT at the sale thereof by the Mobile Telco, shall be subject to OCT upon their use for outbound communication.

4. Sale by Prepaid Load Dealers

In view of the characterization of the sale of Prepaid Credits by parties other than the Mobile Telcos as constituting sale of goods instead of service, the sale of Prepaid Credits abroad by third parties, including the sale of local resellers to foreign buyers/resellers shall be subject to VAT at 0% as the transaction is deemed to be in the nature of export sale of goods.

A third party reseller exporting Prepaid Credit to a foreign buyer shall be

allowed to refund any input tax from its VAT zero-rated sales provided it can prove the actual sale of the Prepaid Credits abroad and that the Prepaid Credits sold abroad are not subsequently sold to a local reseller. A certification coming from the Mobile Telco concerned that the Prepaid Credits purchased by the third party reseller were loaded into mobile phones of subscribers who at the time of loading are outside of the Philippines shall qualify as proof that the Prepaid Credits sold by Prepaid Load Dealers were not subsequently resold in the Philippines.

For purposes of these Regulations, peer-to-peer reloading shall not constitute

resale of Prepaid Credits. Accordingly, if a non-resident purchases Prepaid Credits abroad and thereafter transfers the said Prepaid Credits originally loaded into the non-resident subscriber’s SIM to the mobile phone/SIM of a person in the Philippines, the same shall not constitute resale in the Philippines of such Prepaid Credit. This presupposes that the Mobile Telco is able to identify/distinguish and in fact recognizes a distinction between the treatment of peer-to-peer transactions and E-loading transactions. If this latter condition and assumption is determined to be untrue or to be inexistent, each

26 This provision appears to be necessary to prevent the possible evasion by local wholesalers of the 12% VAT on their purchases. Since the series of transactions including the sale and resale can be done electronically, this can be easily resorted to by local wholesalers. Thus, the system of Mobile Telcos should be able to bar the resale of Prepaid Credit to a subscriber who is in the Philippines at the time of purchase of the load from a Prepaid Credit reseller which purchased Prepaid Credit at 0% VAT.


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transfer of Prepaid Credit from one identified subscriber to another shall be deemed a sale/resale of Prepaid Credit, taxable in accordance with these Regulations.

Section 6.8. Adjustment of Accrued VAT for Prepaid Credit Used for Overseas Communication.—If Prepaid Credit sold and initially subjected to VAT at the time of its sale by the Mobile Telco is ultimately used for purposes of availing of services subject to OCT instead of VAT, the Mobile Telco shall be allowed to make the necessary adjustments in the immediately following period. Summary of the basis of the underlying adjustments shall be made available in case of audit. The summary shall indicate the nature of the transaction for which it was used (i.e., Voice call, SMS, MMS) and the country of destination. Section 6.9. Overseas Communications Tax on Telecommunications Companies.—OCT at the rate of 10% 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 Mobile Telco to collect and remit the same. It is the originating Mobile Telco that has the obligation to remit the OCT.

Notwithstanding the provisions of Section 120 of the NIRC, a Mobile Telco with transactions otherwise subject to the OCT may elect to register such activities as part of their VAT-registered operations pursuant to Section 109(2) of the NIRC in lieu of the OCT. In such case, even its revenue from outbound communication shall be subject to VAT.

Section 6.10. VAT on Interconnection Settlements.— A. Between two PTEs

Access Charges whether arising from voice or data transmission between two (2) PTEs (one or both of them may be a Mobile Telco) are subject to VAT.

Collections from a PTE’s subscriber may include the share of another PTE

pursuant to an interconnection agreement. The VAT collected in such instances should be reported by the collecting PTE in full in the month when such collection was actually or constructively received, while the VAT passed-on by the PTE entitled to the Access Charge shall be deducted from the gross output tax of the collecting PTE in the taxable month when Access Charge are actually or constructively (as in the case of offsetting/set-off) paid/settled. Correspondingly, the PTE receiving Access Charge revenue shall report the output tax pertaining to its Access Charge revenue only in the month when interconnection accounts are actually or constructively settled by the collecting PTE.

B. Between an FA and a PTE

The Access Charge Revenue of a Mobile Telco from Interconnection Settlements from an FA for international voice and data transmission other than international leased lines is subject to 0% VAT provided that the service is paid for in foreign currency and


36


accounted for in accordance with the rules and regulations of the BSP. On the other hand, the Access Charge Revenue of an FA from an interconnection agreement with a PTE is not subject to any tax in the Philippines as such revenue of the FA is from services rendered outside of the Philippines.

Section 6.11. VAT/OCT Treatment of Specific Mobile Telco Transactions.— A. Communications involving a party on roaming:

1. General Rule—

a. In-collect Roaming Charge – Considering that In-collect Roaming Charges are imposed for services rendered outside the Philippines by an FA/Roaming Partner to a subscriber of the collecting Mobile Telco and the collecting Mobile Telco does not necessarily have any participation in the performance of the services for which the charge is being imposed, In-collect Roaming Charges shall not constitute part of the revenue of the Mobile Telco as its function is solely to collect and remit the said charges to the FA that rendered the service. In-collect Roaming Revenue shall be subject to OCT chargeable to the subscriber but the In-collect Roaming Revenue remitted to the FA is neither subject to VAT nor Philippine income tax.

Administration fee/Surcharge imposed by the Mobile Telco on In-bound

Roaming Charges shall be what will constitute the revenue of the Mobile Telco and the same shall be subject to VAT.

Interconnection charge that may be due to the collecting PTE, such as when a roaming subscriber calls another subscriber of the collecting PTE in the Philippines while in the service area of the Roaming Partner/FA shall be separately accounted for and taxed in accordance with the rules on Access Charges, as provided above.

b. Out-collect Roaming Charge - The payment from an FA to a Mobile Telco for

services rendered to a subscriber of the FA while on roaming and within the service area of the Mobile Telco shall be subject to 0% VAT if paid for in foreign currency accounted for in accordance with the rules and regulations of the BSP.

2. Specific Transactions – The VAT treatment of revenues arising from the following

types of transactions involving a subscriber on roaming and a Roaming Partner shall be as summarized in Table A attached hereto:

a. Communication originating from the Philippines to a Mobile Telco subscriber on

roaming; b. Communication originating from a Mobile Telco subscriber while on roaming to

a local telco subscriber;


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c. Communication originating from a subscriber while on roaming to another

Mobile Telco subscriber on roaming;

d. Communication originating from a Mobile Telco subscriber while on roaming to a FA subscriber abroad;

e. Communication originating from a Mobile Telco subscriber while on roaming to

a FA subscriber on roaming in the Philippines; f. Communication originating from a FA subscriber on roaming in the Philippines to

a local/Mobile Telco subscriber;

g. Communication originating from a FA subscriber on roaming in the Philippines to a FA subscriber abroad; and

h. Communication originating from a FA subscriber on roaming in the Philippines to

another FA subscriber on roaming in the Philippines.

B. Fee Share of VAS/Content Providers

The fee share of Content Providers shall be treated in exactly the same way as Access Charge Revenues. The Mobile Telco shall report as revenue the entire amount charged to its subscriber, without deducting that portion of the fee payable to the VAS/Content Provider. The gross revenue collected from a subscriber is subject to VAT at the regular rate of 12%. Input VAT shall be recognized by the Mobile Telco upon its payment or settlement of the charges of the VAS/Content Provider. On the other hand, output VAT shall be accrued by the VAS/Content Provider upon its receipt of payment for its charges from the Mobile Telco.

C. Allocation of Collections from Postpaid Subscriber

Partial payments of postpaid subscribers on their monthly billings which may consist of a combination of billed services subject to VAT and OCT shall require the Mobile Telco to allocate the payment received between the aggregate of billed items subject to VAT and the aggregate of billed items subject to OCT based on the relative value of each type of revenue.

D. Transactions Not Subject to OCT

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 communication services.


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Section 6.12 Electronic Money and Remittance Transactions.—Money received from a person by a Mobile Telco intended for remittance or issuance of equivalent amount of E-money, does not constitute part of the gross receipts or gross sales of the receiving Mobile Telco subject to VAT. Considering that an acknowledgment receipt rather than the Mobile Telco’s official VAT receipt is issued to evidence the receipt of money for remittance or conversion to E-money, on the service/administration/transaction fees and charges of the Mobile Telco for the performance of such transactions for which the Mobile Telco’s official receipt is required to be issued shall constitute part of the revenue of the Mobile Telco subject to VAT. Section 6.13. VAT Treatment of Free Phone Units.—Free phone units which are given to subscribers subject to a lock-up period with the Mobile Telco for a specified postpaid plan shall be treated as customer acquisition cost to be charged to expense over the term of the agreed lock-up period if the same exceeds one (1) year/twelve (12) months. However, if the lock-up period is equal to or less than one (1) year, the same may be charged as marketing/promotions expense on the year the free handset is delivered to a subscriber. In either case, the delivery of the handset to a subscriber shall not be deemed to constitute a sales transaction; accordingly, no VAT shall be due thereon. The maximum amount that can be charged as expense by the Mobile Telco, whether recognized on a one-time basis or amortized over the lock-up period, as applicable, shall be the acquisition cost of the handset given.

The delivery of the handset to a subscriber shall not constitute a sales transaction In view of the foregoing treatment, no sale is deemed to have taken place; accordingly, no VAT shall be due thereon. Section 6.14. Compliance with VAT Regulations.—All the provisions of Revenue Regulations No. 16-05, as amended, such the requirements in the issuance of invoices, except to the extent modified or amended herein for purposes of Mobile Telcos, shall remain applicable and binding to Mobile Telcos. Section 6.15.27 Statements of Account or Billing Statements.—Billing statements periodically issued by Mobile Telcos detailing the charges incurred by a subscriber are not considered as invoice or official receipt.

Recognizing the peculiarities of the industry wherein a single Statement of Account or Billing Statement may contain transactions subject to VAT and OCT (which are treated as VAT exempt), a PTE may issue a single official receipt covering transactions subject to VAT, as well as VAT-exempt transactions. Although a single OR is issued, the VAT-registered customer is required to determine his input VAT claim based on the information shown in the underlying statement of account or billing statement for which the payment is made. The burden of proof on the accuracy of the input VAT claim shall then rest on the VAT-registered customer. However, this rule shall not apply when a Telco opts to register its VAT-exempt activities as subject to VAT. In this case, all transactions billed by the Telco would be subject to VAT and the usual input VAT substantiation rules shall apply. 27 From the draft VAT RMC for the telco industry drafted in relation to RA 9337.RR16-2005.


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Section 6.14. Summary Lists.—Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 08-02, 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. However, telecommunications companies shall only be required to submit a detailed quarterly summary list of sales to all its major Prepaid Load Dealers. Major Prepaid Load Dealers are defined as those with gross sales of Prepaid Credits amounting to an average of at least Two Hundred Fifty Thousand (P250,000) for the completed quarter(s). Sales to all other customers shall be lumped together and reflected as one single amount in the Schedule of Sales.28

Section 7. Treatment of Specific Telco Accounts/Transactions.— Section 7.1. Depreciation Policy.29—For the telecommunications industry, a standard economic useful life for plant, property and equipment (PPE) is hereby adopted and shall apply to all PPE hereinafter acquired by PTEs. PTEs opting to deviate from the prescribed useful life for a particular type of equipment shall obtain prior approval for the purpose indicating the justification or basis for its deviation from the prescribed economic useful life. The deviation from the prescribed economic useful life as prescribed or specifically approved shall be the subject of an agreement as to useful life as prescribed under Section 34(F)(3) of the Tax Code.30

The prescribed economic useful life of the different classes of PPE shall be as

follows:31

28 From the draft RMC on VAT on Telcos. 29 It appears important to provide a separate policy/provision on depreciation considering that a significant portion (approximately 30%) of the operating costs of telcos can be attributed to depreciation expense. 30 "(3) Agreement as to Useful Life on Which Depreciation Rate is Based. — Where under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the National Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to the other party to the agreement: Provided, however, That where the taxpayer has adopted such useful life and depreciation rate for any depreciable asset and claimed the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly authorized representative, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this Subsection. 31 Standard classification of telco PPE should be adopted, based on the classification generally used by the telcos, per their disclosure in their notes to FS. Alternatively, classification of PPE may be made in accordance


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with the classification of PPE under the NTC Chart of Accounts. Alternative classification can be based also on FCC classification in its Uniform Chart of Accounts: “(j) Plant Accounts to be Maintained x x x Property, plant and equipment:

Telecommunications plant in service Property held for future telecommunications use Telecommunications plant under construction-short term Telecommunications plant adjustment Nonoperating plant. Goodwill

Telecommunications plant in service (TPIS) TPIS--General support assets: Land and support assets Land Motor vehicles Aircraft Tools and other work equipment Buildings Furniture Office equipment General purpose computers TPIS--Central Office assets: Central Office--switching Non-digital switching Digital electronic switching Operator systems Central Office—transmission Radio systems Circuit equipment TPIS--Information origination/termination assets: Information origination termination Station apparatus Customer premises wiring Large private branch exchanges Public telephone terminal equipment Other terminal equipment TPIS--Cable and wire facilities assets: Cable and wire facilities Poles Aerial cable Underground cable Buried cable Submarine and deep sea cable Intrabuilding network cable Aerial wire Conduit systems TPIS--Amortizable assets: Amortizable tangible assets Capital leases Leasehold improvements Intangibles


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Class of Property Prescribed Useful Life

a. Buildings 25 years b. Cable & wire facilities 15 years c. Building Improvements 5 years d. Central Office Equipment 5 years f. Vehicles, furniture and other work equipment

3-5 years

g. Land Improvements such as roads 10 years h. Telecommunications equipment: Tower Switch Outside Plant Distribution Drop wires Cellular facilities& others

15 years 10 years 15 years 5 years 10 years

i. Leasehold Improvements 5 years or term of the lease, whichever is shorter

j. Facilities under finance lease Depends on the type of the facility

Notwithstanding the foregoing prescribed economic useful life of PPE or an express

agreement between the Bureau and the Mobile Telco authorizing the deviation therefrom, the remaining book value of PPE of a Mobile Telco may nonetheless be written-off if due to sudden business change.32

Section 7.2. Asset Retirement Policy.33— It is quite common for Mobile Telcos to be contractually required to restore leased properties to their original condition and to bear the cost of dismantling and de-installation of the same at the end of the contract period. Notwithstanding accepted accounting practice allowing the recognition of the fair value of the liability for these obligations and capitalization of these costs as part of the balance of the related property and equipment accounts, which are depreciated and amortized on a straight-line basis over the useful life of the related property and equipment or the contract period, whichever is shorter, for income tax purposes, the same may only be claimed as deduction from gross income when actually incurred and not before then.

32 Allowed under Revenue Regulations No. 2. 33 Note: Consider the need to include a separate provision laying down the guidelines on the treatment of asset retirement-related costs/expenses. Telcos appear to have significant leasing agreements which require them to restore leased property to its original condition and to bear the cost of dismantling and deinstallation at the end of the contract period. Per the disclosure in the AFS of telcos, they recognize the fair value of the liability for these obligations and capitalize these costs as part of the balance of the related property and equipment accounts, which are depreciated and amortized on a straight-line basis over the useful life of the related property and equipment or the contract period whichever is shorter.


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Section 7.3. Related Company Transactions.—As it is observed that PTEs have considerable dealings and make/receive substantial payments to/from related companies, Mobile Telcos are hereinafter required to submit together with their income tax returns a summary of payments made to or received from related corporations, for the period covered by the income tax return being filed. The report shall include the following information: a. name of related company; b. the contract pursuant to which the payment/revenue is paid/received; c. the formula used for the computation of the fees as provided under the contract; and d. the amount of the fee charged to/earned from the related company, exclusive of VAT;

and e. the amount of withholding tax withheld therefrom and the basis for the rate applied.

Related company transactions shall include interconnection agreements, facilities outsourcing services agreements, management support services agreement, co-location agreement, dealership agreement, licensing agreement, facilities lease agreements, value-added services sharing agreement, service provider agreements, inter-company advances, omnibus management services agreement, omnibus services agreement, technical assistance agreement, service distribution agreement, and facilities management agreement.

For purposes of this provision, “related company” in relation to a Mobile Telco, is

any person directly or indirectly controlling, controlled by, or under common control with the Mobile Telco. A person controls another person if the former is an officer or director of the other person, has the power to manage the affairs of the other person by contract or otherwise, or owns twenty percent (20%) or more of the voting shares of the other person and has the ability to influence the business and affairs of that person.34

Section 7.4. Write-off of Receivables. In view of the small amounts of receivables of Mobile Telcos due from delinquent subscribers which however may be of considerable number, it is costly to require Mobile Telcos to commence legal action against each and every delinquent subscriber or to individually ascertain the non-collectibility of such delinquent accounts. Thus, notwithstanding the provisions of existing regulations, Mobile Telcos are herein allowed to write-off delinquent accounts one (1) year after the Mobile Telco has discontinued services to the delinquent subscriber due to non-payment of its billings, provided such amount actually written off under the terms of this provision shall not exceed the credit limit granted to the delinquent subscriber.

Any amount recovered in excess of the balance of the subscriber’s account which has not yet been written off shall be deemed as miscellaneous revenue for the period when the same is received. Thus, any amount collected from a delinquent taxpayer shall first be

34 Under Revenue Audit Memorandum Order No. 1-98 (Audit Guidelines and Procedures in the Examination of Interrelated Group of Companies), “controlled” shall mean any kind of control, direct or indirect, whether legally enforceable and however exercisable or exercised. It is the reality of the control which is decisive, not its form or the mode of its exercise or ownership. A presumption of control arises if income and expenses have been arbitrarily shifted; while the term “controlled taxpayer” means any one or two or more organizations or trade, or businesses owned or controlled directly or indirectly by the same interests.


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applied towards the payment of the subscriber’s balance that has not been written off and the excess recorded as recovery of receivables already written off. All such payments received from delinquent accounts shall be subject to VAT at the time of collection since such unpaid revenues have not been previously subjected or reported for VAT purposes. Section 7.5. Interest Incurred in Financing Acquisition of PPE.—Interest incurred in connection with the acquisition of plant, property, and equipment for use in the business of the Mobile Telco may be capitalized or charged as expense in the period when incurred, consistent with Revenue Regulations No. 13-00, as may be amended from time to time. However, if Mobile Telco decides to treat such interest as expense, the same shall not be offset/netted out against interest income that it may have earned from whatever source.

Once a Mobile Telco decides to adopt a particular treatment, the same shall be irrevocable for purposes only of such specific PPE acquired using such borrowed funds.

Section 8. Additional Reporting and Recording Requirements. — A. In the course of audit of Mobile Telcos, the BIR shall have access to and may obtain

copies of the contracts between the Mobile Telco and other PTEs/FA, dealers, and VAS/Content Providers, among other parties with material transactions with the Mobile Telco, such as but not limited to the following:35

1. Interconnection agreements; 2. Fee sharing agreements with Content Providers; 3. Roaming partners; 4. Remittance partners; 5. Merchants in connection with the use of e-money; and 6. Banks, credit card companies, and other e-money issuers, in connection with the

provision of collection facility for billing payments of postpaid subscribers and more importantly, payment facility for the purchase of Prepaid Credit.

B. Consistent to the provisions of Revenue Regulations No. 16-06 (Submission by

Taxpayers of Electronic Books of Accounts and Other Accounting Records in the Course of a Tax Audit/Investigation) in relation to Section 5(A) of the NIRC, in the course of an audit, the BIR shall have access to/may require the presentation of Usage Data Records,

35 Mobile Telcos may have confidentiality concerns in this regard. However, it has to be pointed out that the NIRC has safeguards in this regard as it makes it punishable for BIR officers and employees to divulge information obtained in the course of their performance of their functions. The relevant provision of the NIRC reads: "SEC 278. Procuring Unlawful Divulgence of Trade Secrets. 35299 - Any person who causes or procures an officer or employee of the Bureau of Internal Revenue to divulge any confidential information regarding the business, income or inheritance of any taxpayer, knowledge of which was acquired by him in the discharge of his official duties, and which it is unlawful for him to reveal, and any person who publishes or prints in any manner whatever, not provided by law, any income, profit, loss or expenditure appearing in any income tax return, shall be punished by a fine of not more than two thousand pesos (P2,000), or suffer imprisonment of not less than six (6) months nor more than five (5) years, or both.


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being the basis of all customer billings, interconnection charges, and billings for fee sharing arrangements.

Data that may be required for presentation by the BIR and to be retained for tax purposes shall in no case include the content of any communication involving the subscribers of the Mobile Telco, but shall be limited to information that will ultimately have impact on the receipts/revenue of the telco and all items that are thereafter deducted therefrom for purposes of arriving at taxable income.

A summary of Usage Data Records36 data shall be attached to support the quarterly income statement, which summary shall contain the following information fields:

a. Total number of calls; b. Average call duration; c. Average calls originated per day; d. Average calls received per day; e. Total minutes of outbound calls and total minutes of local incoming international

calls reported on a per country basis, at least for top ten (10) countries of call destination/origin;

f. Total local inter-PTE calls; g. h. Total NDD calls

a. Intra-network b. Inter-network

i. Originating ii. Terminating

i. Total SMS transmissions a. Local b. International;

j. Total Premium-rated content transmissions summarized per Content Provider at least for the first/top twenty (20) Content Providers.

C. Settlement Statements/Billing Information between networks shall likewise be subject to

audit.37 Details of adjustments/reconciliation between the records of Mobile Telco and

36 Gary M. Weiss, in his article Data Mining in Telecommunications discussed that “[B]efore [this] data can be effectively mined, useful “summary” features must be identified and then the data must be summarized using these features.” Call and network data of telcos, if properly “mined” will be useful in at least three (3) areas as far as the telcos are concerned: (a) fraud detection; (b) Marketing/Customer Profiling; and (C) Network fault isolation. Thus, summarized data as will be required to be prepared for and submitted to the BIR are also ordinarily used by telcos for operations and management decision-making purposes. On the part of the BIR, it will have a way of assessing the reasonableness of the revenues and expenses being reported. Summarized detailed information also enables the BIR to derive information that can be compared with information coming from third-party sources. 37 Sample provision in an Interconnection Agreement concerning the manner of settlement between telcos:


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the other PTE or FA in the course of the Settlement Process shall be retained by Mobile Telcos.

Article VI

MEASUREMENT OF CALLS AND COLLECTION OF CHARGES

Section 16. The parties shall measure both outgoing and incoming calls from their respective networks. Section 17. Each party shall undertake the billing and collection of payments for all outgoing paid calls made by its own subscriber or customer and, if agreed upon by the parties, incoming collect calls made by a subscriber of customer of another party. Unless otherwise agreed upon, the billing and collection of payments for outgoing calls made by a subscriber or customer of a party but using the IXC or IGF facility of another party shall be the responsibility of the party-IXC or party-IGF, as the case may be. Section 18. The parties shall submit to each other settlement statements within sixty (60) days from the end of the month to which the statement pertains. The data required to be included in the statement shall be mutually agreed upon by both parties. In the event a party fails to submit the settlement statement within the said period, any available data for purposes of reconciliation and statement shall be used. The party who failed to submit the data shall have the right to contest or dispute the reconciled data within three (3) months from transaction month. Thereafter, said party shall be barred to dispute the data.

If the party with a receivable does not agree with the settlement statements of the other party, it shall send its own reconciliation statement to the latter within sixty (60) days from receipt of the statement.

A party with payable balance shall pay all undisputed calls within thirty (30) days from receipt of the billing statement sent by the party with receivable.

In cases where the statements of the parties do not reconcile, the following rules shall govern: a. If the variance is four percent (4%) of the amount payable as reflected in the books of the payer or lower, the

party with the (payable) balance shall pay the lower of the two amounts reflected separately in the respective reconciliation statement of the parties;

b. If the variance is more than four percent (4%) but not more than seven percent (7%) of the amount payable, the party with (payable) balance shall pay the lower of the two amounts reflected separately in the respective reconciliation statements of the parties plus fifty percent 50% of the amount of the variance;

c. If the variance exceeds seven percent (7%), the parties shall be given a period of thirty (30) days to settle the dispute. If the parties fail to settle their dispute, the same shall be referred to the Commission for arbitration.

d. In cases falling under (a) and (b), payment of the party with a balance shall be made within thirty (30) days from receipt of the reconciliation statement sent by the party with receivable; Provided, that the payment by the party with a balance shall be without prejudice to the right of the party with receivable to collect the remaining balance and for this purpose, the parties shall be given thirty (30) days to settle their dispute. If the parties fail to settle their dispute, the same shall be referred to the Commission for arbitration. The proceedings mentioned in this section shall be summary in nature and the Commission shall resolve the

matter within a period of thirty (30) days from the time the same is submitted for resolution. Nothing in this section shall prevent the parties from their settling their disputes among themselves by continuous reconciliation of their statements. Section 19. Except as provided in the preceding section, the party with a (payable) balance shall settle the amount due within thirty (30) days after the reconciliation of the statements. Section 20. For International Calls: The collection of payments from the Foreign Administrations for all incoming paid calls and outgoing collect calls shall be the responsibility of the IGF operator that received/sent said international paid calls from/to said Foreign Administration. The parties shall settle the interconnect charges for a particular month within thirty (30) calendar days from receiving the statements also for said particular month from all its foreign correspondents through a toll journal mutually agreed upon by both parties. Within fifteen (15) days from receipt of the toll journal, the party with a payable shall send to the other party a reconciliation statement reflecting the amount computed as payable, otherwise, the toll journal shall be deemed accepted by the party with a receivable. Section 21. The modes of payments including the interests, penalties or surcharges for late payments shall be mutually agreed upon by both parties.


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D. Mobile Companies shall maintain subsidiary records of their revenue and expense accounts, in accordance with the chart of accounts adopted by the NTC. The revenue section of the system of accounts of Mobile Telcos shall be organized by revenue group summary account, account and subsidiary record category, consistent with the NTC Chart of Accounts.

E. In compliance with applicable law and NTC regulations,38 where a Mobile Telco is

likewise engaged in another category of telecommunications service, a separate book of accounts shall be maintained for each category or specialized qualification.

F. There being existing standards in connection with inter-network charging information,

which includes the availability of proof of the services actually performed or provided for a particular user, details of inter-network charges shall be maintained and made available to auditors in case of audit. Details of adjustments in inter-network settlement in the course of reconciliation shall be retained.

F. Mobile Telcos issuing E-money, shall have the necessary facility to fully account for its

transactions in this regard. At the least, it should maintain a record of the identity of the person to whom the E-money is issued, the amount of E-money issued, as well as the people and the businesses/merchants receiving the electronic money as it is used, until the E-money is converted into conventional cash. Cash proceeds/payments from the issuance of E-money shall be accounted for separately from payments received for the services that it rendered or credits for use by its subscriber for telecommunications-related services.

Mobile Telcos issuing E-money shall have a monthly reconciliation of the E-money credits purchased with the payments made to merchants for purchases paid with the E-money issued and the remaining E-money credits of its subscribers. Such reconciliation statements shall be made available in the case of audits.

G. Funds being received by Mobile Telcos in connection with their money remittance

businesses shall be separately accounted for. No part of such funds received from its clients/subscribers, other than the amount it receives as its service fee, shall be booked as part of its revenues and acknowledged by issuance of the Mobile Telco’s official receipt. No disbursements/payments to merchants payable from E-money account of its subscriber shall be claimed as an expense or cost of the Mobile Telco.

38 REPUBLIC ACT NO. 7925 (AN ACT TO PROMOTE AND GOVERN THE DEVELOPMENT OF PHILIPPINE TELECOMMUNICATIONS AND THE DELIVERY OF PUBLIC TELECOMMUNICATIONS SERVICES) and MEMORANDUM CIRCULAR No.: 8-9-95 (SUBJECT: Implementing Rules and Regulations for Republic Act No. 7925 Re: An Act to Promote and Govern the Development of Philippine Telecommunications and the Delivery of Public Telecommunications Services).


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H. Receipt of funds for remittance or issuance of E-money of equivalent value shall be evidenced by an acknowledgement receipt issued in triplicate, serially numbered, and duly registered with the Bureau.

I. Mobile Telcos shall require all their Prepaid Load Dealers to disclose their respective

TINs. Record of the TIN of all Prepaid Load Dealers shall be indicated in the appropriate periodic reports required to be submitted to the BIR.

Section 9. Penalty Provision.— Section 10. Repealing Clause.—Any revenue issuances inconsistent with the provisions of these Regulations are considered amended, modified or revoked accordingly.

Section 12. Effectively Clause.—These Regulations shall take effect fifteen (15) days after publication in the Official Gazette or any newspaper of general circulation, whichever comes first.

Secretary of Finance Recommending Approval: Commissioner of Internal Revenue


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TABLE A ATENEO-EPRA WORKING DRAFT 1-4Oct07 ATTY. RACHEL FOLLOSCO, FMH FOR DISCUSSION PURPOSES ONLY

Income Tax Nature of

Transaction

Home Telco of Caller

Country of Origin

Home Telco of Called

Country of Destination

Income Components Tax Treatment

VAT/OCT

CALLS INVOLVING A ROAMING PARTY

A Outbound calls to a Roaming Phil Mtelco subscriber

Mtelco 1S-RP

Phils Mtelco-1R RP

Foreign 1 a. Regular domestic call charge due from Mtelco 1-RP;

b. In-collect Roaming Revenue due to Foreign 1 Telco; and

c. Administrative fee chargeable to Mtelco1R

a. Included in Gross Revenue of Mtelco 1-RP upon billing or payment, whichever is earlier

b. Excluded from Gross Revenue of Mtelco 1-RP

c. Included in Gross Revenue of

Mtelco 1-RP, upon billing to Mtelco 1R-RP or payment, whichever is earlier

a. subject to VAT b. excluded from VAT coverage c. subject to VAT

B -do- Mtelco 1S-RP

Phils Mtelco-2R RP

Foreign 1 a. Regular domestic call charge with Interconnection fee due to Mtelco 2-RP

b. In-collect Roaming

Revenue due to Foreign 1 Telco; and

c. Administrative fee chargeable to Mtelco2R

a. Entire amount is included in Gross Revenue of Mtelco 1-RP; and Interconnection fee due to Mtelco 2-RP is part of Gross Revenue of Mtelco 2-RP




a. entire amount subject to VAT b. excluded from VAT coverage c. subject to VAT

C -do- Mtelco 2S-RP

Phils Mtelco-1 RP

Foreign 1 Same as B above

D -do- Mtelco 2S-RP

Phils Mtelco-2R RP

Foreign 1 Same as A above



Transaction


Country of Origin




VAT/OCT

E -do- FLtelco 1-RP

Phils Mtelco-1R RP

Foreign 1 a. Toll fee inclusive of interconnection fee due to Mtelco 1-RP

b. In-collect roaming

charge due to Foreign 1 collectible by Mtelco 1-RP from Mtelco 1R-RP

c. Administrative fee chargeable to Mtelco 1R-RP

a. Entire amount is included in Gross Revenue of FLtelco 1-RP; and Interconnection fee due to Mtelco 1-RP is part of Gross Revenue of FLtelco 2-RP




a. entire amount subject to VAT b. excluded from coverage of VAT c. subject to VAT

E Outbound Roaming: Foreign calls of a roaming Phil Mtelco subscriber

Mtelco 1R-RP

Foreign 1 Foreign 1 Foreign 1 a. In-collect roaming charge due to Foreign 1 collectible by Mtelco 1-RP from Mtelco 1R-RP

b. Administrative fee chargeable to Mtelco 1R-RP

a. Excluded from Gross Revenue of Mtelco 2-RP

b. Included in Gross Revenue of


a. excluded from coverage of VAT b. subject to VAT

F -do- Mtelco 1R-RP

Foreign 1 Foreign 1 Foreign 2 Same as E

G -do- Mtelco 1R-RP


H -do- Mtelco 1R-RP


2



Transaction


Country of Origin




VAT/OCT

I -do- Mtelco 1R(a)-RP

Foreign 1 Mtelco-1R(b) RP

Foreign 1 For each of Mtelco 1R(a) and 1R(b), same as E

J -do- Mtelco 1R -RP

Foreign 1 Mtelco-1 RP

Phils Same as E

K -do- Mtelco 1R-RP

Foreign 1 Mtelco-2 RP

Phils a. In-collect roaming charge due to Foreign 1 collectible by Mtelco 1-RP from Mtelco 1R-RP


NOTE: Confirm that there is no interconnection fee required between Mtelco 1-RP and Mtelco-2 RP or Fltelco 1-RP

L -do- Mtelco 1R-RP

Foreign 1 Fltelco 1-RP

Phils a. In-collect roaming charge due to Foreign 1 collectible by Mtelco 1-RP from Mtelco 1R-RP


M -do- Mtelco 1R(a)-RP

Foreign 1 Mtelco-1R(b) RP

Foreign 2 For each of Mtelco 1R(a) and 1R(b), same as E; for Mtelco 1R(a)-RP, in-collect roaming charges attributable to Foreign Telco 1 will be charged by Mtelco 1-RP plus administrative fee while the in-collect charges of Mtelco 1(b)-RP are attributable to Foreign Telco 2 but in addition, administrative fee will be charged on him by Mtelco 1-RP

N -do- Mtelco 1R-RP

Foreign 1 Mtelco-2R RP

Foreign 2 Same as K. NOTE: Confirm that there is no interconnection fee required between Mtelco 1-RP and Mtelco-2 RP or Fltelco 1-RP

O Inbound Roaming: Calls from the Phils. of a foreign Mtelco subscriber

Foreign 1R (a)

Phils Foreign 1 (b)

Foreign 1 a. Out-collect roaming charge

Included as part of Gross Revenue of Mtelco 1-RP

(a) zero-rated if paid for in foreign currency or offset against foreign currency obligation of Mtelco 1-RP to Foreign Telco 1

3



Transaction


Country of Origin




VAT/OCT

P -do- Foreign 1R (a)

Phils Foreign 1 Foreign 2 Same as O

Q -do- Foreign 1R (a)

Phils Foreign 2 Foreign 2 Same as O, out-collect roaming charges will continue to be payable by Foreign Telco 1.

R -do- Foreign 1R (a)

Phils Mtelco 1/2-RP

Phils Same as O

S -do Foreign 1R

Phils Mtelco 1/2R-RP

Foreign 1/2 a. out-collect roaming charges payable by Foreign Telco 1 to Mtelco 1-RP in respect of Foreign 1R;

b. in-collect roaming charges due to Foreign Telco 1/2 in respect of Mtelco ½-RP

c. Administrative fee with respect to Mtelco 1/2R-RP

a. Included in Gross Revenue of Mtelco –RP b. Same as E c. Same as E

a. zero-rated if paid for in foreign currency or offset against foreign currency obligation of Mtelco -RP to Foreign Telco 1 b. Same as E c. Same as E

International T Outbound

Paid Call Mtelco 1 Phils Foreign 1 Foreign 1 a, Regular international call

rate which includes Interconnection fee due to Foreign Telco 1

a. Entire amount is included in Gross Revenue of Mtelco 1-RP, thus, Interconnection fee due to Foreign Telco 1 is part of Gross Revenue of Mtelco 1-RP

a. 10% OCT on the entire amount paid by Mtelco 1-RP; no VAT on Interconnection charge paid to Foreign Telco 1

4

TABLE A ATENEO-EPRA WORKING DRAFT 1-4Oct07 ATTY. RACHEL FOLLOSCO, FMH FOR DISCUSSION PURPOSES ONLY U Inbound Paid

Call Foreign 1 Foreign 1 Mtelco

1/2 - RP Phils a. Interconnection revenue

from Foreign Telco 1 Part of Gross Revenue of Mtelco 1/2-RP

Interconnection charge paid by FA to local telco is subject to 0% VAT if paid for in foreign currency, otherwise, 12% VAT. What if OFFSETTING?


Transaction


Country of Origin




VAT/OCT

Local

V Mtelco 1-RP

Phils Mtelco 1-RP

Phils a. Regular call charge a. Entire amount should be included as Gross Revenue

a. Entire amount should be subject to VAT

W Mtelco 1-RP

Phils Mtelco 2-RP

Phils a. Regular call charge to subscriber of another network (which is inclusive of interconnection fee due to Mtelco 2/Fltelco)

a. Entire amount should be included as Gross Revenue

a. Entire amount should be subject to VAT

X Mtelco 1-RP

Phils Mtelco 1-RP (LD)

Phils Same as W (is the income charge for the fact that it is long distance different for the charge for the reason that it is terminated with another carrier? If the access/interconnection lumped together and designated as one fee but at a higher rate?0

Y Mtelco 1-RP

Phils Mtelco 2-RP (LD)

Phils Same as W

Z Mtelco 1-RP

Phils Fltelco 1-RP

Phils Same as W

5

TABLE A ATENEO-EPRA WORKING DRAFT 1-4Oct07 ATTY. RACHEL FOLLOSCO, FMH FOR DISCUSSION PURPOSES ONLY AA

Mtelco 1-RP

Phils Fltelco 1-RP (LD)

Phils Same as X (is the income charge for the fact that it is long distance different for the charge for the reason that it is terminated with another carrier? If the access/interconnection lumped together and designated as one fee but at a higher rate?0

6

MOA NTC-BIR ATENEO-EPRA Working Draft 1 Atty. Rachel Follosco FMH, Consultant FOR DISCUSSION PURPOSES ONLY

MEMORANDUM OF AGREEMENT

BETWEEN THE BUREAU OF INTERNAL REVENUE

AND THE NATIONAL TELECOMMUNICATIONS COMMISSION

KNOWN ALL MEN BY THESE PRESENTS: This Memorandum of Agreement (“Agreement”) is entered into this ________ day of ________ 2007, by and between:

The NATIONAL TELECOMMUNICATIONS COMMISSION, a government agency created under Executive Order No. 546 promulgated on 23 July 1979, as amended, with offices at the National Telecommunications Commission Building, BIR Road, Quezon City, represented herein by its Commissioner, RUEL V. CANOBAS, who is duly authorized, hereinafter referred to as NTC;

- and - The BUREAU OF INTERNAL REVENUE, also a government bureau organized and existing under Republic Act No. 1189, as amended, with offices at the Bureau of Internal Revenue Building, BIR Road, Quezon City represented herein by its Commissioner, LILIAN B. HEFTI, who is likewise duly authorized, hereinafter referred to as BIR.

WITNESSETH: That—

WHEREAS, the National Internal Revenue Code of 1997 (Tax Code), as amended, mandates the BIR to administer and execute all internal revenue tax laws;

WHEREAS, Section 6 of the Tax Code specifically vests in the BIR powers and

duties to assess and collect all national internal revenue taxes;

WHEREAS, Sec. 5(B) thereof authorizes the BIR Commissioner and his subordinates to obtain on a regular basis, from any person, government agencies and instrumentalities any information to ascertain the liability of any person for any internal revenue tax;

MOA NTC-BIR ATENEO-EPRA RPF Working Draft 1 Atty. Rachel Follosco FMH, Consultant FOR DISCUSSION PURPOSES ONLY

WHEREAS, NTC is the sole body that exercises jurisdiction over the supervision, adjudication and control over all telecommunications services throughout the country;

WHEREAS, among the functions of the NTC under Executive Order No. 546 (EO 546) are: to establish, prescribe, and regulate areas of operation of public service communications; determine and prescribe charges or rates pertinent to the operation of such public utility facilities and services except in cases where charges or rates are established by international bodies or associations of which the Philippines is a participating member or by bodies recognized by the Philippine Government as the proper arbiter of such charges or rates; and for the effective enforcement of this responsibility, adopt and promulgate such guidelines, rules, and regulations relative to the establishment operation and maintenance of various telecommunications facilities and services nationwide;

WHEREAS, in the course of and as necessary inputs for its effective performance of its functions, NTC requires telecommunications companies (Telcos) to submit to it technical as well as financial information and other data and documents;

WHEREAS, such data available/made available to NTC concerning Telcos, their operations and the results thereof, contractual arrangements, rates imposed, capacity and capacity utilization, among others, may also constitute information that is useful to the BIR, either for purposes of verifying or assessing the tax compliance of a particular Telco or for purposes of gathering statistics needed to develop analytical tools such as benchmarks for the telecommunications industry against which the level of tax compliance of Telcos may initially be compared;

NOW, THEREFORE, for and in consideration of the foregoing premises, the NTC and the BIR, through their respective representatives, subject to the provisions of Sec. 270 (Unlawful Divulgence of Trade Secrets) in conjunction with Sec. 71 Disposition of Income Tax Returns, Publication of Lists of Taxpayers and Filers) of the Tax Code, as amended, do hereby agree to undertake the following: A. The NTC shall:1

1. Enforce compliance by Telcos of its reportorial requirements such as the annual

report required to be submitted by Telcos pursuant to Section 17(h) of 1 It may have to be discussed with the NTC whether reports mentioned containing information relevant to the BIR will be (a) furnished to the BIR directly by the Telco submitting said report to the NTC; (b) furnished by NTC itself to the BIR, whether periodically or solely upon request; or (c) BIR will simply be given access to such reports should it need the same. Alternatively, the availability of the option of maintaining an NTC data base of information which specifically authorized officers BIR may remotely access, may be discussed. Access authorization systems may be put in place to ensure that the BIR will not have access to information in the NTC database which NTC has not previously agreed to share with the BIR.

2


Commonwealth Act No. 146 (CA 146)2 as reiterated in Memorandum Circular No. 79-05;3

2. Endeavor to enforce stricter compliance with its Uniform Chart of Accounts for

purposes of ensuring comparability and facilitating consolidation of industry statistics, adopted pursuant to NTC Memorandum Circular No. 12-05-00;4

3. Give access to the BIR to information or data available to its Rates and

Regulation Division,5 which is responsible for the formulation of criteria and standards for the determination and formulation of rates, evaluation of applications for rates to be charged, conduct studies on rate structures, uniform systems of accounts; conduct economic research, compiles financial statistics and monitors and compiles annual reports of Telcos;6

4. Promptly provide the BIR information on NTC issuances, policies, and

regulations, as well as international treaties, conventions, and agreements on telecommunications to which the Philippine Government is a signatory, particularly those which have impact on the revenue/rate or expense computation, recognition, presentation, or reporting of Telcos;

5. Provide the BIR access to information regarding access charges and revenue

sharing arrangements;

6. With respect to Value-Added Service (VAS) providers and content providers, furnish BIR information available to it regarding the mode of operation, method of charging rates, lease and other agreements with Telcos;

7. The applicability and extent of subsidy/cross-subsidies within the

telecommunications industry and any available summary of the impact of such system of subsidies on specific Telcos;7

2 Attached as Annex “A”. 3 Attached as Annex “B”. The information that is included in the Annual Reports is as summarized in Annex “C”. The annual reports are required to be submitted not later than 30 April (previously 1 March) of each year following the year of operation. Any extension of time granted for the submission of the annual reports is subject to the payment of an extension fee. Please refer further to NTC Memorandum Circular 04-10-2006 attached hereto as Annex “D”. 4 Attached hereto as Annex “E”. 5 The organizational structure of the NTC is attached hereto as Annex “F”. 6 Section 5.5(c), Part C, National Telecommunications Commission Practices & Procedures Manual, April 27, 1992. 7 Section 12 of Executive Order No. 109 s. 1993 expressly required that internal subsidy flows shall be made explicit in the financial reporting system of the telecommunications service providers. The same EO provides that, until universal access to basic telecommunications service is achieved, and such service is priced to reflect actual cost, local exchange service shall continue to be cross-subsidized by other telecommunications services within the company.

3


8. Monthly list of service rates of PTEs whose rates have been deregulated, as required to be submitted to the NTC pursuant to NTC Memorandum Circular No. 8-9-95;

9. Give access to information submitted in connection with any application being

made with the NTC, particularly those relating to financial information consisting of:

a. Feasibility study; b. Information re:

i. Acquisition cost of equipment inclusive of cost to install; ii. Business case for the system such as pro-forma income

statements and balance sheet for the first 10 years of operation; iii. Source of funding for the project; iv. Itemized list of existing and additional investment costs of the

project showing: 1. acquisition cost; 2. appraised value by NTC; 3. accumulated depreciation;

v. estimated life; vi. itemized list of projected expenses; and

vii. itemized list of projected revenues and subscribers for each service (per Appendix E-1, Part C, National Telecommunications Commission Practices & Procedures Manual, April 27, 1992)

10. Provide BIR copies of Reference Access Offer (RAO, i.e., the default offer or

agreement containing the terms and conditions, including prices, on which a public telecommunications entity is prepared to provide access and other related services to ay access seeker), as from time to time submitted by Telcos to NTC pursuant to NTC Memorandum Circular No. 10-07-20078 (dated 19 July 2007), which shall include those for the following services:

a. Fixed network origination/transit/termination services; b. Mobile network origination/transit/termination services; c. Fixed internet access call origination/transit/termination services; d. Mobile internet access cal origination/transit/termination services; e. Retail narrowband and broadband services (for VASP) connection; and f. Mobile data origination/termination services.

11. Provide BIR with a list of registered content providers (registered pursuant to

NTC Memorandum Circular No. 03-03-2005A9) and VAS providers which is 8 Attached hereto as Annex “G”. 9 Attached hereto as Annex “H”.

4


ordinarily released by the NTC containing the name, address, name of responsible officer, telephone numbers, fax number, registration number, nature of VAS provided, and term/termination of registration;10

12. Require Telcos to submit to the BIR a duly received copy of the Annual Report

required to be submitted to the NTC;11 13. Strictly enforce the requirements prescribed under NTC MC No. 13-06-2000 on

Billing of Telecommunications Services,12 specifically but not limited to the following:

a. All charges shall be itemized in the billing statements; b. That Telcos shall ensure that the customers of their prepaid SIM cards are

properly identified and their address verified through the presentation of valide identification cards, whether such SIM cards are sold directly by them or their authorized agents; and

c. That Telcos shall submit to the NTC on a quarterly basis their list of authorized dealers/outlets of prepaid cards(/electronic load)13 nationwide.14

14. Not later than 15 February of each year, provide the BIR with an alphabetical list

of all operating telecommunications companies as well as their respective NTC approved activities. More specifically, such listing shall have the following column headings:

a. Name of Registered Enterprise; b. Type of Registered Enterprise; c. TIN of Registered Enterprise; d. Location(s) /Address; e. NTC Registration Number; f. Registered activities; g. Types of revenues arising from its registered activities (with the

corresponding account code indicated).

10 Sample list is attached as Annex “I”. 11 Refer to Annex “C” for the outline of information required to be included in the annual reports. 12 Attached as Annex “J”. 13 The NTC issuance does not expressly include e-load as e-loading was still non-existent (at least in the Philippines) in 2000 when the issuance was approved. 14 The report for submission to the NTC in this regard may be negotiated by the BIR to be required to include the complete address, TIN, telephone and fax number, name and address of president/proprietor, and value of year-to-date transactions with the Telco.

5


Amendments to any information indicated in the foregoing list happening during the first six (6) months of the year shall be submitted to the BIR not later than 30 July of the same year;

15. NTC shall, in case of issuance of additional approvals or licenses to

telecommunications companies to perform additional services which will earn income constituting a different class of income from those previously earned, require the Telco concerned to submit a copy of such additional license granted by the NTC to the BIR;

16. Require all Telcos to register all their areas of operations (head office, branch or

facility) with the appropriate BIR Revenue District Offices (RDOs) having jurisdiction over such area (head office, branch or facility), pursuant to the registration requirements provided under Sec. 236 of the Tax Code, as amended, and its implementing regulations; and

17. Require all Telcos, content providers, and VAS providers applying for registration

or licenses with the NTC to indicate in the appropriate forms of the NTC their respective TIN;

18. Require all Telcos to submit together with their Annual Reports to the NTC, a

copy of their annual income tax returns (ITRs), together with the Audited Financial Statements (AFS) and other required supporting attachments/schedules filed with the BIR and duly stamped "Received" by the BIR or acknowledged to have been electronically filed with the BIR, to ensure that the NTC is relying on the same data/financial statement as that which has been submitted to the BIR.

B. The BIR shall:

1. Furnish NTC with copies of pertinent BIR regulations, rulings, other revenue issuances, and other information within thirty (30) days from issuance thereof, subject to the provisions of Sec. 270, in conjunction with Sec. 71 of the Tax Code, as amended;

2. Issue a Revenue Memorandum Circular for the effective implementation of the

provisions of this Agreement. C. The NTC and BIR shall:

1. Within thirty (30) days from signing of this Agreement, create a Working Group, with the possible inclusion of one representative each from the Department of Finance (DOF) and Department of Transportation and Communication which shall have the following functions:

6


a. oversee and monitor the proper implementation of the provisions of this

Agreement and ascertain if there is a need to issue and promulgate specific guidelines and procedures for the orderly implementation of the provisions of this Agreement, which guidelines and procedures shall be issued not later than three (3) months from date of this Agreement;

b. receive, preliminarily discuss, and prepare initial recommendations to the

agency concerned (whether the NTC or the BIR) on matters/proposals submitted to it for consideration and study, such as but not limited to:

i. possible issuance of regulations by NTC to address concerns that

may be raised by the BIR such as the need to identify SIM cards allowed for use in e-loading business and monitor their level of business and the need to identify and verify the legitimate existence of prepaid load dealers dealing directly with the Telcos; and

ii. proposals seeking to streamline the information reported to the

agencies to avoid duplication or to ensure uniformity or comparability;

2. Undertake to promptly resolve any issues involving discrepancies in exchanged

data/information; and

3. Disseminate to concerned parties the contents of this Agreement in order to make them aware of the herein requirements.

D. Effectivity:

This Agreement shall take effect upon signing and shall remain effective until otherwise modified thru an addendum mutually agreed, approved and duly signed by the parties hereto. IN WITNESS WHEREOF, the parties hereto have affixed their signatures this ___ day of __________, 200_, in the _____________, Philippines.

NATIONAL TELECOMMUNICATIONS

COMMISSION (NTC)

BUREAU OF INTERNAL REVENUE(BIR)

7

MOA NTC-BIR ATENEO-EPRA RPF Working Draft 1 Atty. Rachel Follosco FMH, Consultant FOR DISCUSSION PURPOSES ONLY By:

By:

RUEL V. CANOBAS LILIAN B. HEFTI Commissioner Commissioner

APPROVED BY:

DEPARTMENT OF TRANSPORTATION AND

COMMUNICATION

DEPARTMENT OF FINANCE

By:

By:

LEANDRO R. MENDOZA Secretary

MARGARITO B. TEVES Secretary

SIGNED IN THE PRESENCE OF:

ACKNOWLEDGEMENT Republic of the Philippines ) Quezon City ) SS. BEFORE ME, A Notary Public for and in the ___________________ on this ___ day of _____________, 200_, personally appeared the following: Name Comm. Tax Date Placed Certificate No. Issued Issued

8

MOA NTC-BIR ATENEO-EPRA RPF Working Draft 1 Atty. Rachel Follosco FMH, Consultant FOR DISCUSSION PURPOSES ONLY all known to me and to me known to be the same persons who executed the foregoing Memorandum of Agreement, which consists of ____ (_) pages, including this page and they acknowledge the sane is their free and voluntary act and deed of the entities herein respectively represented. WITNESS MY HAND AND SEAL on the date and place first above written Doc. No. ________; Page No. ________; Book No.________; Series of ________.

9

Technical Assistance on Regulatory & Operational Enhancements of the Telecommunications Industry Atty. Rachel P. Follosco, FMH

THIRD PARTY INFORMATION

In the telecommunications industry, the use of information from third parties can be maximized to ensure more effective tax enforcement within the industry, as well as among those with substantial business dealings with Philippine telecommunications companies (“telcos”).

Information from Philippine telcos can be used for purposes of evaluating the level of tax compliance of companies with substantial business dealings with them, such as their major prepaid card and load dealers and content providers. On the other hand, to be able to verify the correctness and accuracy of income and expenses reported by Philippine telcos for tax purposes, independent sources of information need to be tapped. Considering that Philippine telcos have both locally- and foreign-sourced income as well as local and outbound payments, third parties for purposes of securing information may include not only local third party sources such as the other Philippine telcos but also foreign third party sources. Third Party Information to Aid in the Audit of Philippine Philippine Telcos A. Local Sources

Information from Other Philippine Telcos. The financial information furnished by a Telco, specifically with respect to interconnection expense payments it made, constitutes third party information that can be used to verify, to a certain extent, the correctness of the amount of interconnection revenue that another Philippine telco reported. Third party information for purposes of auditing the tax compliance of other Philippine telcos can consist of information that come from the returns, alphalists, and summary lists1 submitted by other Philippine telcos. It is noted that there are significant inter-Telco transactions and corresponding revenue inflows from, as well as disbursements to other Philippine telcos due to interconnection that take place between/among the Philippine telcos.

At present, it appears that interconnection fees (alternatively referred to as access fees

or outpayments) due to other Philippine telcos are not recognized as expenses but amounts earmarked for remittance to other Philippine telcos. Likewise, the interconnection fee portion of gross receipts received by Philippine telcos for payment to another Philippine telco 1 Pursuant to Revenue Regulations (“RR”) No. 16-2005, Quarterly Summary Lists of Sales and Purchases are required to be submitted. The guidelines in the preparation and submission of the same are provided for under Sec. 4.114-3 of said RR. Other than the said summary lists, pursuant to RR No. 02-06, taxpayers (engaged in business or exercise of their profession) are required to attach Summary Alphalist of Withholding Agents of Income Payments Subjected to Withholding Tax (“SAWT”) and Monthly Alpahlist of Payees (“MAP”) when they file specified returns. MAP is required to be filed with BIR Forms No. 1601-E (expanded withholding tax), 1601-F (final withholding tax) and 1600 (Monthly Remittance Return of VAT/Other Percentage Taxes) while the SAWT is required to be attached to income tax returns (quarterly and annual) as well as quarterly VAT returns and monthly VAT declarations, and monthly percentage tax returns.

Economic Policy Reform & Advocacy Ateneo de Manila University-USAID

2


is set aside and is not reported as part of the paying Philippine telco’s gross revenue. Thus, the summaries/lists from other Philippine telcos may not be as useful in verifying the accuracy of the interconnection revenue that is being reported by the Telco entitled to/receiving such interconnection fees. It should be noted that this practice is different from the practice in other countries such as in the U.S., Singapore, New Zealand, and even China, where interconnection fees due to other telcos is reported as operating expense or as an integral component of the cost of services but, at the same time, the said amount is initially reported as part of the gross revenue of the paying telco. This is evident from a comparison of the expense accounts reported by a Telco like Globe Telecom compared to the expense accounts reported by foreign carriers (“FAs”).2

Because of the foregoing treatment in the Philippines, it would appear that

remittances of interconnection fees to other Philippine telcos are not subjected to withholding tax. This removes one layer of cross-checking opportunity for the BIR because it is not able to countercheck the amount subjected to withholding tax by the paying Telco against the amount of income reported by the receiving Telco.

It should be noted that this is one of the areas that the draft revenue regulation

proposes to address by requiring the reporting of gross revenue at its full amount, i.e., inclusive of the interconnection fee component, subject however, to the right of the paying Telco to claim interconnection expense. Although, theoretically, the present practice and the proposed policy should yield the same reported gross income for the paying Telco, the mandatory reporting of the interconnection fee as expense has the further tax benefit of compelling the paying Telco to report the same in its financial statement, withhold income tax on the revenue payment to the other Telco, and report the expense in its periodic summary lists submitted to the BIR, thereby creating a potential source of third party information on interconnection revenues of Philippine telcos.

National Telecommunications Commission. Data that is being submitted to the BIR may be cross-referenced to/verified against the other information that the BIR may be able to obtain from the National Telecommunications Commission (“NTC”). It is for this purpose that a Memorandum of Agreement (“MOA”) between the BIR and the NTC has been proposed and drafted.

It should be noted that the NTC has significant amount of information on each of the Philippine telcos as well as on the industry, in general, which may be useful in developing benchmarks for the industry. Pursuant to NTC regulations, several reports/information/documents are submitted to the NTC periodically, which may contain information relevant to the BIR (for purposes of assessing a specific Philippine telco, better understanding the industry, and/or developing industry benchmarks), including but not limited to the following: 2 Copies of relevant portions of the audited financial statement of Globe Telecom, Inc., Embratel Participacoes S.A., Sibirtelecom OJSC, Telecom Corporation of New Zealand Limited, AT&T, and China Mobile (Hong Kong) Limited as Annexes “A-1” to “A-6”, respectively.


2

3


a. the annual report required to be submitted pursuant to Section 17(h) of Commonwealth Act No. 146 (The Public Service Law); and

b. copies of interconnection agreements entered into among the Philippine telcos (as

required to be submitted to the NTC pursuant to NTC Memorandum Circular No, 14-7-20003).

Other documents and reports which may be relevant to the BIR and which are in the

possession of the NTC have been specifically mentioned in the draft MOA as among the reports/documents to which BIR should either be given copies of or access to by the NTC. This information sharing initiative between the NTC and the BIR is consistent with emerging micro trends in compliance. As stated by Jeremy Andrulis in his report on revenue and fiscal management—4

Integration throughout government departments Sharing data and streamlining services among government departments and levels enables customers to comply with tax obligations more efficiently. One technique for simplifying taxpayer services requires government standardization and integration across local, regional, central and international jurisdictions. Breaking down traditional department silos will require strong, active executive leadership. Departments must also use common rules, technology standards, integrated service channels and pervasive information sharing processes. Integrated government teams, that draw resources from different functional areas, respond to all customer needs. x x x

Integration and coordination requires sharing knowledge. The next-generation revenue department uses knowledge to form holistic views of a taxpayer within the department and across the government. Revenue departments know taxpayer needs, habits and tendencies. They use that information to improve compliance and aid other department goals. Leading nations have begun to share information with motor vehicle agencies to cross-check financial data of taxpayers. They can then use the information to tag audits and perform other compliance initiatives. Revenue departments collect much of the same information (for example, name, address, income and employment status) required by other departments. Today, ownership of data equals power. Governments must develop a culture where pervasive information sharing exists and address information needs from an enterprise perspective. Integrating information from other departments will allow revenue departments to perform more robust data analysis and validation, leading to more efficient and effective services and compliance.

3 Implementing Rules and Regulations (IRR) for the Interconnection of Authorized Public Telecommunications Entities, attached hereto as Annex “B”. 4 Jeremy Andrulis, Revenue and fiscal management: Tomorrow’s government at work, a publication of IBM Institute for Business Value, copy attached hereto as Annex “C”.


3

4


Government integration can produce significant compliance and operational processing efficiencies. Revenue departments need to understand how interoperable their processes, organizations and technology architectures are with other departments. Do business and technical resources jointly develop and implement strategic plans? Does an intranet or common drive exist to share information across government departments? Are common performance measures established? Do standard data definitions, rules, templates and terms exist across departments? Are common citizen and business data stored in a central location?

B. Foreign Sources

1. Telecommunications industry regulatory agencies

Inasmuch as Philippine telcos have substantial dealings with FAs which are ultimately reflected as either interconnection expense or revenue of Philippine telcos, depending on whether the communication is inbound or outbound, it is worthwhile for the BIR to find third party sources of information which can serve as basis for its verification of the magnitude of interconnection expenses and revenues reported by Philippine telcos. Considering that the BIR will not be able to easily identify and secure information directly from FAs with which the Philippine telcos have dealings, its alternative is to request information from the governmental agencies regulating telcos in the different countries. The BIR can initially target the telecommunications industry regulators in the top five (5) foreign countries where Philippine international interconnection traffic is sourced/destined. In the United States (“U.S.”), for example, relevant information from the Federal Communications Commission (“FCC”) may be requested and obtained by the BIR. On the other hand, the Office of Communications (“Ofcom”), which is the counterpart of the FCC in the United Kingdom (“U.K.”), may be requested to provide interconnection revenue data to or from the Philippines gathered from U.K. telecommunications companies.

It is observed that governmental agencies regulating the telecommunications

sector, whether the NTC in the Philippines or its counterpart agencies abroad, have broad authorities and are visibly active in the regulation of the industry, particularly, in connection with rate setting as well as efficient and effective delivery of services. In this regard, it is apparent from their respective regulations that they mandate the submission of and do collect substantial amounts of detailed information from telcos subject to their regulation. A significant portion of these information gathered are financial in nature, i.e., detailed figures of the revenue and expense/cost accounts of telcos. The focus of BIR’s interest in such reports gathered by and usually summarized by the regulatory agencies is but a minute part of the huge volume of data that is available with these regulators. Specifically, the BIR will only be interested in the following information:

1. Interconnection expense or outpayments (which is the product of the applicable rate

multiplied by the number of minutes) paid by FAs to the Philippines; and 2. Interconnection revenues of FAs from Philippine telcos.


4

5


Federal Communication Commission and Similar Regulatory Agencies.5 There

is significant value in obtaining access to information from the different countries with respect to the volume of transaction of the telecommunications sector of the different countries with those in the Philippines.

A cursory search of available information on net access charge payments to the Philippines yielded information that, with respect to the U.S., there has been a significant and steady increase in net payments by U.S. telcos to the Philippines. The total minutes of U.S. billed calls bound for the Philippines has been increasing at over 25% annually from 1998 to 2003. Necessarily, interconnection/access revenue of Philippine telcos with which U.S. carriers have to interconnect for purposes of terminating the said calls must be tracking this same increase in volume. However, this may not necessarily result in the increase in revenue from interconnection revenue from the U.S. because, admittedly, over the years, there has been a decline in the billed end-user revenue per minute.

If, for example, the BIR has the benefit of information concerning the number of minutes of calls originating from the U.S. and terminating in the networks of Philippine telcos, then the BIR can at least ascertain whether or not the Philippine telcos have been accurately reporting their interconnection/access revenue from the U.S. Locally, the BIR only needs to secure information, directly from the Philippine telcos, on the number of minutes of calls from the U.S. that were terminated in their networks. This can be obtained, for example, by requiring interconnection revenue details to be broken down into domestic and international interconnection/access revenue, the latter further broken down per country. This information may also be obtained from a summary of information from the call detail records which may be required to be submitted on a quarterly basis with the quarterly income tax return.

Admittedly, revenue from interconnection charges reported by local telcos,

particularly those from abroad, are difficult to verify. Information and statistics available with the FCC, which often include dollar values of outpayments for interconnection charges as well as indicative or average access charges that are being paid by U.S. telcos to their counterpart in different countries, is a potentially effective way of verifying the accuracy of international access/interconnection revenue being reported by Philippine telcos.

5 This discussion refer to information and statistics contained in various FCC reports, specifically: (1) The International Bureau Report, September 2005 (Annex “D”); (2) 2005 International Telecommunications Data (filed as of 31 October 2006), April 2007 prepared by the FCC Strategic Analysis and Negotiations Division Multilateral Negotiations and Industry Analysis Branch of the International Bureau (Annex “E”); (3) Trends in the U.S. International Telecommunications Industry prepared by Linda Blake and Jim Lande of the Industry Analysis Division of the Common Carrier Bureau of the FCC dated August 1998 (Annex “F”); and (4) FCC Report and Order (FCC 97-280) in the Matter of International Settlement Rates, adopted August 7, 1997, released August 18, 1997 (Annex “G”).


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It may also be fruitful for the BIR to try to establish official communication with the relevant offices6 of the FCC and explore the possibility of obtaining the underlying details on the aggregate figures for the Philippines that is indicated in the FCC reports/statistics, so that BIR can more directly use the information that it obtains from FCC data in the assessment of specific Philippine telcos.

Due to lack of material time, other than for the U.K., there was no opportunity to

obtain information whether the counterpart agency of the FCC in the other countries where Philippine telcos source substantial amount of interconnection/access revenue have statistics and reports similar or comparable to those being made available by the FCC to the public. Assuming that the counterpart agencies of the FCC in the other countries do not post as much useful information as the FCC does on the internet, the BIR may be able to officially communicate directly with the foreign counterparts of the FCC and NTC in the other countries. For this purpose, however, it is imperative for the BIR to be able to specifically identify the information it needs. The BIR may initially refer to the FCC categories of available information as this should be a good/reasonable guide in determining the kind of information that is similarly collected by the telecommunications industry regulatory agency in the other jurisdictions.

Office of Communications. The Ofcom has significantly the same functions as

the FCC. Ofcom was established as a body corporate by the Office of Communications Act 2002 and is the regulator for the U.K. communications industries, with responsibilities across television, radio, telecommunications, and wireless communications services. It is evident from the regulatory financial reporting obligations it imposed on British Telecommunications Plc and Kingston Communications (Hull) Plc, two telecommunications companies considered to have significant market power in the U.K., that it requires the detailed reporting of “Outpayments” (i.e., mainly interconnection expense), whether these pertain to geographic calls, calls to mobile, and international calls.7 Thus, it is likely that it would have information on the interconnection/outpayments of these major companies to Philippine telcos.

Further, Ofcom specifically declares that it implements the Freedom of Information Act of 2000 of the U.K., a law establishing a general right of access to all

6 It appears that statistics/data/information relevant to the BIR is being collected by the Industry Analysis Division, Common Carrier Bureau of the United States Federal Communications Commission (FCC) and likewise, the FCC International Bureau gathers information and statistics in connection with international telephony, including international traffic data reports containing data reported on a country-by-country basis for international message telephone and private line services. See sample international telecommunications data prepared by the International Bureau of the FCC attaches as Annexes “H-1” to “H-4” and tables of benchmark rates from the Report on International Telecommunications Market prepared by the FCC dated 7 December 1998, attached as Annex “I”. 7 The Regulatory Financial Reporting Obligations on B and Kingston Communications Final Statement and Notication (Accounting separation and cost accounting: Final statement and notification) dated 22 July 2004.


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types of recorded information held by public authorities.8 Other than information that can be found on the website of Ofcom (www.ofcom.org.uk), in compliance with the said law, third parties may request and Ofcom shall provide the requested information, provided that there is no applicable exemption that prevents it from providing such information, e.g., commercially sensitive information or information which, if disclosed, constitutes unwarranted invasion of privacy.

We note that the U.S. also has its counterpart Freedom of Information Act

(“FOIA”).

Barriers to Information Sharing. Whether under the FOIA or the U.K. version of the said law, it appears that the kind of information that is relevant to the BIR are not likely to be refused under any of the identified legal barriers to information sharing. The discussion in the article, “The President’s National Security Telecommunications Advisory Committee Legislative and Regulatory Group Telecommunications Outage and Intrusion Information Sharing Report” dated June 19999 provides some guidance as to what types of information are likely to be legally barred from being shared. The article identified, among others, the following as the legal impediments to information sharing:

• Confidential information; • Trade secrets and proprietary information; • Classified information; and • National security.

2. Tax Authorities of Other Countries

Other than the foreign telecommunications industry regulatory agencies, the BIR

may also obtain third party information from its counterpart internal revenue agencies abroad. The readily available legal basis of the BIR for submitting requests for information from its counterparts abroad is the exchange of information article (“Exchange of Information Article”) that is in the existing tax treaties of the Philippines with 35 countries.10

Philippine tax treaties have more or less the following provisions on exchange of

information:

8 Freedom of Information Act 2000: Ofcom’s Publication Scheme and related pages from the Ofcom website are attached hereto as Annex “J”. 9 The relevant portions of the article is attached hereto as Annex “K”. 10 Australia; Austria; Bahrain; Bangladesh; Belgium; Brazil; Canada; Czech Republic; Denmark; China; Finland; France; Germany; Hungary; India; Indonesia; Israel; Italy; Japan; Korea; Malaysia; The Netherlands; New Zealand; Norway; Pakistan; Romania; Russia; Singapore; Spain; Sweden; Switzerland; Thailand; United Kingdom of Great Britain and Northern Ireland; United States; and Vietnam.


7

http://www.ofcom.org.uk/

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(1) The competent authorities shall exchange such information as is necessary for carrying out the provisions of this Convention or for the prevention of fraud or for the administration of statutory provisions concerning taxes to which this Convention applies provided the information is of a class that can be obtained under the laws and administrative practices of each Contracting State with respect to its own taxes.

(2) Any information so exchanged shall be treated as secret, except that such

information may be —

(a) Disclosed to any person concerned with, or (b) Made part of a public record with respect to the assessment, collection,

or enforcement of, or litigation with respect to the taxes to which this Convention applies.

(3) No information shall be exchanged which would be contrary to public policy. (4) If information is requested by a Contracting State in accordance with this

article, the other Contracting State shall obtain the information to which the request relates from or with respect to its residents or corporations in the same manner and to the same extent as if the tax of the requesting State were the tax of the other State and were being imposed by that other State. A Contracting State may obtain information from or with respect to its residents or corporations in accordance with this paragraph for the sole purpose of assisting the other Contracting State in the determination of the taxes of that other State.

(5) If specifically requested by the competent authority of a Contracting State,

the competent authority of the other Contracting State shall provide information under this Article in the form of depositions of witnesses and copies of unedited original documents (including books, papers, statements, records, accounts, or writings) to the same extent such depositions and documents can be obtained under the laws and administrative practices of each Contracting State with respect to its own taxes.

(6) The exchange of information shall be either on a routine basis or on

request with reference to particular cases. The competent authorities of the Contracting States may agree on the list of information which shall be furnished on a routine basis.11 (emphasis ours)

As stated in the preface of Revenue Memorandum Order No. 7-85 (Report of

Audit Examiners on Taxable Transactions of Residents for purposes of the Exchange of Information Program under the Philippine Tax Treaties), double taxation agreements provide for an exchange of information between treaty partners and the same is considered an “essential part of the treaty in order that it can carry out its main

11 Article 26 of the RP-United States Tax Treaty.


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objective, which is to facilitate international movement of capital, technology and persons by eliminating double taxation without creating loopholes for fraud or evasion of such taxes.” It likewise admits that, “experience has shown the inadequacy of tax administrations that rely solely on information from within their borders to deal with problems of international tax evasion.”

The most recent BIR issuance in connection with the implementation of the Exchange of Information Article is Revenue Memorandum Order No. 42-9712 which prescribes the revised procedures in requesting information from tax treaty partners pursuant to Philippine tax treaties. Under the said issuance, it appears that requests for information are required to be coursed through the International Tax Affairs Division of the BIR (“ITAD”) and approved by the BIR Commissioner.

The other countries are likely to have their own internal procedures on how

exchange of information under the tax treaties are to be addressed. Prior to making any request pursuant to the Exchange of Information Article, it is prudent that the specific procedures of the other treaty country in this regard be obtained. For example, in the case of the U.S., the Internal Revenue Service has its Internal Revenue Manual (“Manual”), Chapter 60 of which deals with International Procedures, which among others, contains provisions governing exchange of information (4.60.1).13 Section 4.60.1 of the said Manual provides for the guidelines on the implementation by the U.S. of the Exchange of Information Article which are ordinarily in its tax treaties as well as in Tax Information Exchange Agreements with other countries. A review of the information contained in the said section of the Manual is helpful in determining what kind of information can be requested under the Exchange of Information Article, how requests are required to be initiated, the request format, foreign initiated request procedures, among others. It is also expressly noted in the said Manual that currently, the U.S. has working arrangements with the Philippines, among other countries with respect to the implementation of the Exchange of Information Article.

Use of Information from Philippine Telcos as Inputs in the Assessment of Taxpayers Dealing with Philippine Telcos

The information that is contained in the returns of Philippine telcos as well as the required attachments to said returns in the form of alphalists/summary lists could serve as very useful sources of third party information for use in the audit of taxpayers with substantial dealings with Philippine telcos. However, the information required in said returns and required attachments may still be further augmented to make the information therein more readily useful for this purpose. a. More Detailed Alphanumeric Codes

12 Copy attached as Annex “L”. 13 Copy of this Section 4.60.1 of the Manual is attached hereto as Annex “M”.


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In the course of completing the previous study on retailing mobile phone credits

by electronic loading and its tax implications, it became apparent that there is difficulty in running after the wholesale prepaid load dealers of the Philippine telcos primarily because they cannot be readily identified from the information coming from the Philippine telcos. Even with the list of buyers/sources of revenue of Philippine telcos listed in the summary list of sales transactions attached to the VAT returns of Philippine telcos, one cannot identify which of the listed customers of the Philippine telcos are dealing with the Philippine telcos as prepaid load dealers. Thus, targeted enforcement (i.e., directed specifically against prepaid load dealers) cannot be pursued unless the Philippine telcos are directly requested to provide a list of their prepaid load dealers. Alternatively, the list of prepaid load dealers of Philippine telcos may be obtained from the NTC, assuming the NTC is strictly enforcing its requirement for Philippine telcos to furnish the NTC with the names, among other details, of their dealers.

Likewise, despite the submission by the Philippine telcos of summary lists of their purchases/payments, it is impossible to identify from the said lists, those doing business with the Philippine telcos as content providers. If the BIR wants to know which of the income payees is a content provider, it would also need to specifically request the same information from the Philippine telcos or alternatively obtain the list of registered content providers from the NTC, considering that the NTC now requires all content providers to register with it.

It would be ideal, however, if from the summary lists periodically submitted by the Philippine telcos, the BIR could already readily identify the detailed types of income being paid or earned by the Philippine telcos. While the summary/alphanumeric lists include a column requiring information on the nature of income payment made, the description of the income is tied to the corresponding alphanumeric tax code (ATC) required to be indicated in the immediately preceding column. ATCs are quite limited and mainly classified in accordance with general account/tax types for use across various industries. No specific codes are available for the specific use the telco industry; thus, it may be possible to further classify the revenues and disbursements of Philippine telcos and designate industry-specific ATCs. For example, Telco revenues may be classified into postpaid subscription revenue and prepaid subscription revenue. Alternatively, whatever revenue and expense classifications are adopted in the NTC Chart of Accounts may be assigned corresponding ATCs.

b. Inclusion of RDOs of Major Payees/Payors of Philippine Telcos

A review of the prescribed format of summary/alpha lists indicate that the Tax Identification Number (“TIN”) of the payors or payees of various income is required to be indicated, however, their corresponding Revenue District Office (“RDO”) is not required to be indicated. If the RDO of the income payee/payor appearing in the lists is indicated, the information concerning said taxpayer can be readily directed to the concerned RDO. The latter can use the information as an input and possible trigger for


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the conduct of an audit on the said taxpayer. Further, a feedback mechanism can be put in place by requiring the recipient RDO to give the Large Taxpayers Service (“LTS”), which forwarded the information, a report on the action it has taken on the basis of the information it received from the LTS.

Based on the consultation made with ACIR-Information Systems Operations Service Alberto A. Pio de Roda, it was confirmed that use of information coming from the returns and attached lists submitted by the Philippine telcos to the LTS can still be maximized to benefit the RDOs if the LTS can forward relevant information from the submissions of the Philippine telcos to the concerned RDOs.

Even if there are taxpayers which have substantial purchases or revenues from the

Philippine telcos based on the summary lists, information on the amount of the sales made to or purchases from the Philippine telcos does not necessarily reach the RDOs where the said taxpayers are registered. Thus, the RDOs of such taxpayers are bound to conduct their audit of said taxpayers without the benefit of such third party information from the Philippine telcos. While it is true that the RDOs can obtain third party information, they have to do so at their own initiative and probably entailing significant time and effort on their part. With an established procedure for the LTS to feed the RDOs with third party information coming from reports submitted to it by large taxpayers, the RDOs are compelled to act upon such information which constitutes valuable input to any audit effort.

As it may be too cumbersome to obtain the RDO of all taxpayers included in the

summary lists/alphalists of large taxpayers, a threshold transaction value can be set which will trigger the need to include such information.


11


Economic Policy Reform & Advocacy

COMMENTS ON THE COMPUTERIZED ACCOUNTING SYSTEM EVALUATION AND APPROVAL PROCEDURE

FOR MOBILE TELCOMMUNICATIONS COMPANIES

The latest procedure in the processing and approval of applications for permits to adopt computerized accounting systems (“CAS”) or components thereof are as laid down in Revenue Memorandum Order (“RMO”) No. 29-02,1 whose provisions have been further clarified in Revenue Memorandum Circular (“RMC”) No. 71-20032 (RMO No. 29-02 and RMC No. 71-2003 are hereinafter collectively referred to as the “CAS Issuances”). The CAS Issuances as well as those which they supersede prescribe the requirement that taxpayers desiring to adopt CAS or components thereof need to secure prior BIR approval. We discuss our comments/recommendations in connection with specific provisions of/procedures prescribed in these issuances below. Composition of the CSET: Participation of Industry Specialist in CAS Audit Planning The actual CAS audit for purposes of approval of an application for a CAS or a component thereof should be preceded by prior consultation with an industry specialist, aside from involving a telecommunications audit and a computer audit specialists. The industry specialist should be able to give the Computer Systems Evaluation Team (“CSET”) vital background information and relevant information that is unique to the industry including any new developments in the industry, as well as any other relevant information as will enable the CSET to have a better understanding of the telecommunication company (“telco”) operations as well as peculiarities. An industry specialist should be able to orient the CSET about industry issues, practices and trends. An industry specialist will enable the CSET to better visualize the business of a telco so they can contextualize the technical documentation which have been submitted to the CSET. Prior to the briefing by an industry specialist, the latter should also be properly oriented as to what kind of information the BIR would be interested in so that the discussion of the industry specialist could be better focused. However, the specialist should not limit itself to addressing the specific concerns of the BIR but should likewise discuss as much information as would be relevant to the audit of the CAS application of a telco. We note that the engagement or involvement of an industry specialist in the CAS approval process may not be required in all instances. However, briefings, consultations, and

1 Revised Procedures in the Processing and Approval of Applications for Permit to Adopt Computerized Accounting System (CAS) or Components thereof Amending RMO 21-2000. 2 Subject: Clarification of Issues Affecting the Revised Procedures in the Processing and Approval of Applications for Permit to Adopt Computerized Accounting System (CAS) or Components Thereof per RMO No. 29-2002.

Ateneo de Manila University-USAID


Economic Policy Reform & Advocacy 2

discussions with industry specialist should be held at periodic intervals during the year so that the CSET is always kept abreast with developments in the industry as these developments may have an impact on what the CSET will have to look into with respect to the features of the CAS being submitted for evaluation and approval. Under RMO No. 29-02, it is expressly mentioned that there shall be a workshop to be undertaken by the Human Resource Development Service (“HRDS”) in coordination with the Operation and Information Systems Group to orient both the technical and the functional groups on the scope, substance and evaluation of CAS. We believe that the participation of the industry specialist can be accommodated at this stage. The BIR may need to obtain the services of an independent consultant for its telco industry specialist requirement as the BIR may not have anyone who can qualify for the purpose. An industry specialist is one who is familiar with the operations and business of telcos and is well informed of the new products, trends, and prospects of the telco industry by reason of a previous or ongoing involvement with the industry whether on a consultancy or employment with a telco. It would be ideal if the industry specialist has/had participation in/knowledge of the financial accounting/business side of the operation of the telco. Walk-through/Systems Demonstration It appears from the terms of RMO No. 29-02 that the conduct of an actual system demonstration of the proposed CAS is discretionary on the CSET.3 We believe that upon the initial application for approval, it would be best that the actual system demonstration be undertaken and dispensed with only under exceptional circumstances, the criteria for which should be specifically identified. Post Approval Audit Aside from the pre-approval evaluation that is conducted, it is suggested that there be a post approval evaluation which should be made at least once a year. The scope of the post-approval evaluation may vary, depending on the scope of previous evaluation made and the

3 The procedure is expressly qualified by the clause, “if deemed necessary”. Further, Part V(B) of RMO No. 29-02, provides:

B. Computerized System Evaluation Team (CSET):

1. X x x 2. Determine the need for a systems demo and coordinate with LTAD I/II/TSS of

LTDO/RDO for scheduling x x x. 3. Attend systems demonstration, which may be conducted on a test or production

environment, if necessary. 4. X x x.(underscoring ours)




level of complexity of the system in place. Post approval examinations are best conducted on a limited issue or focused examination basis. For example, a limited variety of test transactions can simply be fed into the system, with or without the knowledge of the telco, and thereafter, the CSET can simply check if the data coming from its test transactions have been properly captured, processed, and reported by the telco. Based on the CAS Issuances, post-approval examination may be conducted pursuant to a Mission Order issued by the Assistant Commissioner-LTS or the Regional Director. On the basis of the findings from such post-approval examination, recommendation will be made to either revoke the permit to use the CAS or allow the continued use of the same. In respect of post system evaluation, RMC No. 71-2003 provides:

Q-40 Who shall conduct the post system evaluation of the approved CAS of a branch? A-40 The CSET of LTAD I or II, LTDO or RDO having jurisdiction over the Head Office of the branch shall conduct the post system evaluation of the approved CAS, provided that there should be proper coordination with the concerned CSET having jurisdiction over the branch. Q-41 If during the Post System Evaluation, the CSET members discovered that the taxpayer is using a system other than that of the approved CAS or a modified version of the approved CAS, would the recommendation for revocation of permit be final? A-41 Yes, the revocation of the previously approved permit to use CAS shall be final and executory. Hence, it is mandatory for the taxpayer to apply for a new permit. Q-42 Shall the CSET members be allowed to conduct post system evaluation in case the taxpayers modify/enhance its CAS? A-42 The CSET shall have the authority to conduct post system evaluation through a Mission Order that shall be secured prior to its conduct. Q-43 What shall be the alternative course of action by CSET members in case the taxpayer prohibits them to check into its server during the post system evaluation? A-43 The CSET members shall report the taxpayer to the Legal and Enforcement Service, Attention: Tax Fraud Division. Q-44 Is the six (6) - month period of interval from the date of approval of permit required before the CSET can conduct post system evaluation? A-44 There is no required period of interval to post evaluate the approved CAS of the taxpayer. The CSET can conduct post system evaluation of the approved CAS as the need arises.




It is evident from the CAS Issuances that there is no categorical requirement for the conduct of post approval evaluation by the CSET, although admittedly, there is discretion on the part of the BIR to conduct the same. We suggest that post-approval examination be specifically required to be conducted at least once a year. This will deter the propensity of taxpayers from concealing the fact that there have been changes made on the CAS, denying the BIR the opportunity to evaluate and specifically approve the same. The scope of the actual post-approval examination procedures is what will be subject to discretion, but not whether or not a post-approval evaluation will be conducted. In the case of telcos, for purposes of post-approval examination, it would be best to first be able to identify the new developments in the telcos industry, including the new products that they are offering and the new transactions/arrangements that they have been getting into. The websites of all these telcos are rich with information on these, including the pricing schemes for their various chargeable and value-added transactions/services. It would be interesting to determine how these new transactions are being addressed/processed by the previously approved CAS. It has to be ascertained whether further customization had to be made on the CAS previously approved to be able to likewise handle its new breed of transactions. If further customization had to be made, the CSET will have to check whether prior approval for the same was obtained. For example, the old generation prepaid card technology was subsequently almost completely superseded by electronic loading. It is interesting to note what changes had to be made, if any, to the previously approved CAS to adapt it to the new electronic loading technology in place. It can reasonably be expected that the CAS, as previously approved by the BIR, needs constant upgrading to be able to handle newer types of transactions. While it is true that the telcos have been filing applications for the approval of changes to their existing approved CAS, the CSET will also need to satisfy itself that all changes being made are in fact being submitted for approval. Selection of Representatives to the CSET RMO No. 29-02 prescribes the composition of the CSET as follows:

IV. COMPUTERIZED SYSTEMS EVALUATION TEAM (CSET) A. For purposes of this Order, a Computerized System Evaluation Team [CSET] shall be created in the National Office and Regional Offices. The CSET shall convene at least twice a month to conduct the appropriate evaluation and recommend the approval of applications to adopt Computerized Accounting System [CAS] or components thereof. The CSET shall be composed of the following members:

1. National Office




Group I Head : Chief, Large Taxpayers Assistance Division (LTAD) I Asst. Head: Chief, Computer Operations, Network and Engineering Division(CONED) -Information Systems Operations Service Data Center (ISOSDC)

Members: Representative of Information Systems Operations Service –Data Center (ISOS-DC)

Representative of LTAD I Representative of Large Taxpayers Audit and Investigation Division Group II Head : Chief, Large Taxpayers Assistance Division (LTAD) II Asst. Head : Chief, CONED - ISOS-DC Members: Representative of ISOS-DC Representative of LTAD II Representative of Large Taxpayers Audit and Investigation Division II 2. Large Taxpayers District Office (LTDO) Head : Concerned Large Taxpayer District Officer Asst. Head : Chief, CONED of the nearest RDC (As determined by

DCIR,ISG) Members: Representative of concerned RDC Representative

of Assessment Section of the LTDO Representative of Taxpayer Service Section of the LTDO 3. Regional Office/Revenue District Office (RDO) Head : Concerned Revenue District Officer Asst. Head : Chief, CONED of the Revenue Data Center (RDC) concerned Members: Representative of concerned RDC Representative of Assessment Section of the RDO Representative of Taxpayer Service Section of the RDO

During our meeting with Ms. Janette Cruz, Head, Computerized Systems Evaluation Team – LTAD –I, she mentioned that she is not aware how the LTS Audit and Investigation representatives in the CSET for purposes of evaluating the CAS applications of telcos are selected and if said representatives to the CSET are necessarily the most qualified, particularly in terms of previous experience in auditing telcos. Moreover, Ms. Cruz is also not certain whether the LTS auditors who are in the CSET for purposes of evaluating the CAS applications of telcos subsequently end up performing the tax audit of the telcos. We note that if the representatives of LTS in the CSET are subsequently tasked of perform the tax audit on the telcos, then they will be able to capitalize on their familiarity with the CAS of the telcos.




The CAS Issuances do not lay down any specific criteria in the selection of representatives of the Information Systems Operations Service-Data Center and Large Taxpayers Audit and Investigations Division. We are of the view that the representative from the LTS Audit and Investigation in the CSET should be more methodically chosen, i.e., membership in the CSET should be based on prior, preferably extensive, experience or exposure in the actual audit of telcos. Further, the same representative to the CSET should be nominated for all similar CAS applications. This will enhance the expertise of such representative in the evaluation of telco CAS. As the telco industry systems and operations are highly technical and specialized, it would be very difficult to have a new person in the CSET all the time. The time allotted to complete the evaluation process,4 given the amount of work needed for a thorough evaluation of the CAS of telcos, a representative in the CSET may not have enough time to learn about/familiarize himself with telco systems and operations within the same period that evaluation is on-going. While basic auditing procedures remain applicable, one cannot overlook the fact that a modest level of knowledge and understanding of telco systems and operations will be very helpful in identifying what aspects of the CAS one should inquire into, what questions to ask from the applicant, what sort of audit procedures would be best to test the integrity of the system, and what kind of test data will best test the system. Institutionalizing Use of Information from CSET CAS Approval and Evaluation Procedures We understand that it is not certain that the LTS representatives in the CSET in-charge of evaluating CAS applications of telcos end up having any participation in the regular tax audit of the telcos. It would be to the advantage of the LTS to specifically have its representative in the CSET-Telco to likewise have direct participation in the audit of the telcos as it can benefit from the representative’s familiarity with the CAS of the telcos. In case of rotation among its auditors, it is important that the auditor who has had participation in the evaluation of the CAS of telcos to conduct a briefing for the benefit of LTS auditors who may be auditing telcos for the first time and are unfamiliar with the peculiarities of telco accounting, recording, and data processing. This will ensure the transfer of valuable information. Moreover, we understand that the working papers as well as all the filings being made by the telco in relation to their applications for approval of their CAS/components thereof are on file with the office of Ms. Cruz. The complete file is available for the reference of LTS auditors. To the extent that LTS auditors are auditing taxpayers using CAS, part of their preparation for such audit should be familiarization with the CAS of the taxpayer on the basis of the files available with the CSET. The auditors do not necessarily need to get in-depth knowledge of the CAS of the telco they will be auditing but they should at least have some working knowledge on the same. For purposes of this portion of our undertaking, we were furnished sample submissions by a telco in connection with its application for the approval of a component of its CAS. By 4 RMO No. 29-02 indicates that the maximum allotted time for CAS evaluation is only forty (40) days.




merely reviewing the diagrams/flowcharts submitted to the CSET, one can readily prepare a strategy on how a particular account can be audited, what reports are generated by the system that can be examined to verify account balances in the financial statements, what consolidations and offsetting is happening in the course of processing, recording, and settlement. One of the flowcharts clearly indicate that there is a netting-out process that happens between the Traffic Settlement Receivable and Traffic Settlement Payable Accounts with respect to a particular carrier. Knowing this, an auditor should endeavor to check that not the netted-out amount but the pre-netting values are those reflected in the accounts of the corporation or if the amount presented is net, the auditor should endeavor to obtain the gross amounts prior to the offsetting between the account balances and verify the accuracy/correctness of the net amounts indicated in the telco’s financial reports. The diagrams also tend to identify the documents/data that serve as inputs for a particular accounting process/procedure such as the processing of customer billings. In the sample diagrams furnished, for example, it is indicated that the inputs in billing statement processing includes information from banks and credit card companies with respect to payments received by them for the telco. This information should cause the auditor to consider obtaining third party information from banks and credit card companies as to the amount of payments which were received by them for the telco’s account. This can be compared to the totals indicated in the billing summary/summary sheets and thereafter verified against the gross receipts from post paid subscribers that is reported for VAT purposed. We note that, when we inquired with Ms. Cruz if any LTS auditor has requested the CAS application file of telcos, we were informed that, to her knowledge, no one other than those within the CSET has requested access to the CAS-related filings/documents of the telcos. Test Data/Transaction for Use in CAS Evaluation It is one of the principal objectives of this portion of this study to identify types of test transactions/data that should be made to go through the CAS for purposes of ascertaining that the CAS is able to capture all data necessary for recording purposes, the data captured is correctly recorded and processed, such that the appropriate accounts are updated and the updated accounts are subsequently reported for accounting and tax purposes. The test data should encompass a wide variety of transactions and should be based on the offered services of the telco. By running test data through the CAS, the BIR is able to ascertain that there is no leakage in the CAS, i.e., no unrecorded transaction or a transaction which is recorded but the records of which are ultimately diverted and do not end up being reported in the mandatory reports and statements of the telco. With the test data, the CSET will be able to walk-through the system several times, each time involving a different type of transaction. The entire processing of accounting data from a transaction may not be completed on a real time basis since admittedly, there are recordings that are made and further processing that need to be done on a periodic basis/in batches.




Moreover, the recording of the receipt of payment for a transaction, if involving a postpaid subscriber, will have to await the completion of the collection. A detailed walk-through is invaluable in that it gives the CSET ample opportunity to check whether there is offsetting that takes place along the way and in this regard, it will have to satisfy itself that notwithstanding the offsetting, the gross amounts are actually still being reported so as not to understate the actual amount/volume of the telco’s transaction. As has been the emphasis of this Study, specific steps are being recommended to ensure that— 1. all revenue sources of telcos are being declared and accurately reported; 2. interconnection revenues and expenses are fully declared and no intervening offsetting of

accounts in the course of settlement has affected the declared balances; 3. all income and expenses arising from fee sharing arrangements are likewise

independently fully reported, i.e., reported in their respective gross amounts rather than their net amounts;

4. all sales of prepaid load, whether purchased in the form of card or electronically have been fully reported and subjected to VAT upon their sale, subject to adjustment due to possible applicability of overseas communications tax in lieu of VAT for a portion of their gross revenue from prepaid load.

Test data shall consist of one or more transactions representing each and every possible source of core and non-core revenues/income of the telco, which shall include the following: Prepaid load Using a prepaid mobile phone subscription, the following transactions may be completed. The CSET will have to determine how many test transactions will be made for each of the types of test transactions listed below.

Test Transaction Objective 1. Purchase of electronic

load from a randomly-selected sari-sari store or other retailers

To ascertain— 1. what recording, if any, takes place at the telco’s end

upon the purchase of e-load from a sari-sari store; 2. if the system of the telco is able to ascertain who

among its dealers is responsible for the sale of the load; i.e., whose prepaid load credits should be reduced for the value of the e-load purchased;

3. if the wholesale dealer who is the ultimate supplier of the e-load is registered with the telco;

4. the bulk sale of e-load to the selling wholesale dealer was previously recorded, the income recorded, and the VAT thereon paid; and

5. the accounting system of the telco recorded the reduction in the available credits of the wholesale




dealer from whom the sari-sari store purchased its load.

2. Using the purchased e-load

a. send a local text (SMS/MMS) to-- i. a subscriber of

the same telco; ii. subscriber of

another telco; iii. a premium-rated

number such as 2366

To ascertain if and how the system— 1. records revenue from SMS/MMS; 2. records and processes the interconnection revenue due

to another mobile telco as expense; 3. records the billing and settlement of the

interconnection revenue due to another telco to ensure that there is no automatic offsetting that takes place, which makes it difficult for the BIR to check the original amount of revenues due to/from other telcos or if netting out is a default procedure, ascertain that the net figures are nonetheless accurate and are properly recorded;

4. reduces the available load credits of the sending subscriber;

5. transfers the value of the load used from deferred revenue to earned revenue upon the use of the load; and

6. records the share of a third party in the revenue earned in the case of premium-rated SMS.

b. send an international text (SMS/MMS) to-- i. a subscriber of

the same telco on roaming

ii. a subscriber of another telco on roaming

iii. a subscriber of a foreign telco (“FA”)

Ascertain if and how the system— 1. records interconnection revenue due to another telco

from an SMS/MMS that is outbound (sent abroad); 2. reverses the VAT previously computed on the sale of

the prepaid load; 3. records the transaction to ensure that the gross

revenue from the same is captured as part of the revenue subject to Overseas Communications Tax (“OCT”);

4. reduces the available load credits of the sending subscriber;

5. transfers the value of the load used from deferred revenue to earned revenue upon the use of the load; and

6. records the interconnection revenue due to an FA and thereafter processes the same.

c. make a domestic call

to-- i. a subscriber of

the same telco

Ascertain if and how the system— 1. reduces the available load credits of the sending

subscriber; 2. transfers the value of the load used from deferred




ii. a subscriber of another mobile telco

iv. a landline subscriber

revenue to earned revenue upon the use of the load; and

3. records the interconnection revenue due to another telco (another mobile telco or fixed line telco service provider).

d. make an international call to-- i. a subscriber of

the same telco on roaming

ii. a subscriber of another mobile telco on roaming

iii. a subscriber of an FA

To ascertain if and how the system— 1. reduces the available load credits of the sending


revenue to earned revenue upon the use of the load; 3. reverses the VAT previously computed on the sale of

the prepaid load 4. records the cost of the call and to ensure that the gross

revenue from the transaction is captured as part of the revenue subject to Overseas Communications Tax (“OCT”); and

5. records the interconnection revenue due to another telco/FA, and reflects the billing and settlement of the interconnection revenue due to another telco to ensure that there is no automatic offsetting that takes place, which makes it difficult for the BIR to check the original amount of revenues due to/from other telcos/FAs.

e. download ringtone f. download a game



revenue to earned revenue upon the use of the load; 3. records the share of a third party in the revenue earned

in the case of premium-rated SMS; and 4. records the settlement of the amount due to a third

party (e.g., check if withholding tax is deducted from the payments due to the third party).

g. make peer-to-peer

reloading and subsequently use the transferred airtime credit to call/send SMS


subscriber; and 2. records the receipt of the load credits by the recipient

and the use of the load passed to another subscriber.

h. surf the web to download (e.g., a





news article from a local site like ABS-CBN News and a foreign site such as google)

i. download a song j. text to an artist k. send an MMS to an

e-mail address l. reply to a text sent

through Chikka.com


revenue to earned revenue upon the use of the load; 3. records the share of a third party in the revenue earned

in the case of premium-rated SMS; and 4. records the settlement of the amount due to a third

party (e.g., check if withholding tax is deducted from the payments due to the third party).

3. From the phone of the telco’s subscriber on roaming a. call a mobile phone

of the same telco in the Philippines

b. call a mobile phone of another mobile telco in the Philippines

c. call a Philippine landline

d. call a subscriber of an FA abroad

To determine— 1. what recording is made or triggered by the system on

account of this transaction; 2. whether there is any VAT or OCT that is computed

on the revenue from this transaction; 3. the manner charges for such services are actually

recorded; 4. what types of revenues are recognized on account of

said transaction; and 5. how amounts payable to another FA/telco are settled

(where the call is made from abroad to a subscriber of another telco) and such settlements recorded (check for netting out or offsetting).

4. Reload through the

internet – charge to a bank account

To determine— 1. what recording is made by the system at the time of

the transaction; 2. whether income is recognized at the time airtime

credits are loaded unto a subscriber’s SIM/account; 3. whether the revenue from the same are captured in the

gross revenue account of the telco subjected to VAT as of the applicable period;

4. how settlement is recorded; and 5. whether settlement made by the bank is subjected to

any withholding tax. 5. Reload through the

internet, charge to a credit card account

To determine— 1. what recording is made by the system at the time of

the transaction; 2. whether income is recognized at the time airtime

credits are loaded unto a subscriber’s SIM/account; 3. whether the revenue from the same are captured in the

gross revenue account of the telco subjected to VAT as of the applicable period;




4. how settlement is recorded; and 5. whether settlement made by the credit card company

is subjected to any withholding tax. 6. “Purchase” e-money (for

loading into an e-wallet) a. from the telco’s

service centers b. from a participating

bank c. from non-bank

participating centers

To determine— 1. what recording is made at the time of the transaction; 2. how billings to banks and non-bank participating

centers are processed; 3. whether cash for e-cash issuance is separately

accounted for in the books of the telco; 4. whether there is income recognized from the

occurrence of such transaction and if such income recorded becomes part of the tax base of the telco for VAT purposes;

5. whether there is any related expense incurred by the telco and revenue on the part of the bank/participating center from the said transaction per the books of the telco; and

6. what entries are made at the time payment/cash is received from the bank/participating center.

7. Use e-money to— a. purchase electronic

load b. purchase

merchandise such as a movie ticket

c. use e-money to pay for food in a participating restaurant

To determine if and how the system— 1. records the use of e-cash for the purchase of e-load

and other goods and services; 2. recognizes payable to third party merchants -, i.e.,

whether the recognition is at the time of the transaction between a subscriber and third party merchant or at the time the third party merchant bills telco for the amount of the transactions;

3. recognizes any other income such as discount arising from the use of e-cash when settles the amount due to the third party merchant;

4. records any revenue from the use of the e-cash by subscribers, making sure that such income is included in the taxable income reported by the telco;

5. records the conversion of e-money in an e-wallet into e-load credits; and

5. records any withholding tax on the settlement payments made to third party merchants.

8. Enroll for to a promo

such as unlimited one (1) day texting and send SMS during the term of the term of the promo availed of

To determine if and how the system— 1. reduces the available load credits of the subscriber

enrolling under the promo; 2. transfers the value of the load used from deferred

revenue to earned revenue upon the enrollment under the plan; and




3. records and monitors/identifies SMS sent pursuant to such promo.

9. Send money through the

mobile telco remittance service through-- a. a service center of the

telco b. a local partner

service provider c. an international

partner service provider

To establish— 1. how the telco records the transaction; 2. how much revenue is recorded; 3. whether the telco revenue from the transaction is

recognized in its books and how it is recorded; 4. how receipt of the money intended for remittance is

recorded in the books of the telco, as distinguished from the revenue portion attributable to the telco

5. how the share of the partner service provider is recorded in the books of the telco (ascertain whether there is a corresponding commission expense or service fee recorded in the books of the telco to reflect the portion of the income that goes to the partner service provider

6. whether the telco maintains separate books for the recording of the money received for remittance.

10. Recipient of the remittance will— a. keep the money in

its e-wallet b. choose to encash the

remittance received

To ascertain— 1. how the telco’s system records the redemption of the

money remitted 2. what revenues, if any are earned or recorded in the

course of remittance, including the redemption of the cash equivalent of the remittance

3. what accounting entries are made to record the transaction

11. Allow prepaid load credits to lapse

To ascertain— 1. how the system records the expiration of load credits

and the timeliness of such recording 2. that revenue is recognized at this juncture such that

part of the unearned revenue account balance should be reclassified

The CSET must also purchase prepaid load sold through prepaid cards and likewise complete the transactions indicated above. Postpaid The CSET should also have test data from transactions in nos. 2, 3, 6, 7, 9 and 10 above but using a postpaid mobile phone, for essentially the same objectives as indicated above, i.e., generally to ascertain that the CAS properly captures the necessary accounting information, records, and process the same as represented and as appropriate under the circumstances.




Other Matters Familiarization with Telco Billing System Since our study is focused on ensuring that all revenues of the telcos are being reported and that all revenue payments of the telcos are likewise fully reported so that there is a reliable source of third party information necessary for the effective audit of the parties/merchants dealing with telcos, we deem it best that the CSET, in reviewing the CAS of telcos, should have a good understanding of the billing systems of telcos.5 The billing system of telcos presents certain peculiarities. For example, there are initially no source documents to speak of but the charges that are ultimately recorded as revenue of the telco are based on data that is gathered remotely and with hardly any human intervention, from the telco switches, gateways, clearing houses and similar source. The data that is captured by these switches include the duration of the call, the source of the communication and the receiver of the communication, among a considerable number of other information. Information regarding specific transactions such as calls, SMS, download of information, among others, are summarized in what are generally referred to as usage detail record (“UDR”) and call detail record (“CDR”) if specifically referring to call-related billing details. The information contained in the UDR coming from the switches are recorded in chronological sequence and these records constitute the source of the information ultimately fed into the billing system, whether the billing system pertains to accounts payable by its subscribers or other telcos such as in the case of interconnection revenue that it collects from another telco. The UDRs record all transactions of telcos in significant detail, whether the transaction pertains to those of its prepaid or postpaid subscribers. The UDRs do not only include information that enable the telcos to compute their charges due from their subscribers and other telcos. It simultaneously records information that enables the telcos to ascertain how much interconnection charges they owe to other telcos on account of the transactions of their subscribers. It should be noted, however that the UDR does not contain financial information as the valuation or rating of the recorded transaction is only done after the necessary data is captured in the UDR and the same is passed through the rating engine. In conducting the evaluation of the CAS of telcos, each completed telecommunications test transaction should necessarily be traceable to a UDR. Thus, running a test transaction through the system of the telco would enable the CSET to satisfy itself that the CAS of the telco is able to accurately capture accounting data from each transaction. Assuming that the UDR reflects the test transaction, the CSET can thereafter trace how the information in the UDR is further processed such that the monetary consequence of the transaction is ultimately 5 Refer to the attached copy of Introduction to Telecom Billing Usage Events, Call Detail Records, and Billing Cycles written by Avi Ofrane and Lawrence Harte.




captured/included in the cost/expense reported by the telco, for accounting as well as tax purposes. Knowing the format of the UDR and the range of information that is contained in them should give the CSET and the LTS audit representative in the CSET an idea on what types of information/statistics are readily available with the telcos and what information can be requested and readily provided by the telcos. The aggregate of the number of call minutes on a daily basis can in fact be obtained as the same can simply be derived from the information in the UDRs. Sorting of information in the UDRs can be made to derive vital statistics such as total outgoing international calls (in minutes), total non-revenue SMS, total domestic mobile to landline calls, among others. These types of information can in fact be very helpful to the BIR for purposes of its benchmarking program. Admittedly, summary information from the UDR are not expressed in pesos and centavoss; nonetheless, the summary statistics from UDRs can be helpful in evaluating the reasonableness of the income and expense declarations of the telcos. In the case of call detail summaries, the BIR can simply multiply the average charge rate for each type of call to arrive at an estimated revenue amount.


Documents

Technical Assitance on Regulatory & Operational Enhancements of the Telecommunications Industry