BIR Ruling [DA-053-05]

February 8, 2005 BIR RULING [DA-053-05] Sec. 105 Philippine Postal Corporation 3/F, Central Office Building Liwasang Bonifacio Manila Attention: Mr. Diomedio P. Villanueva Postmaster General & CEO Gentlemen : This refers to your letter dated August 5, 2003 requesting, in effect, for a ruling exempting Philippine Postal Corporation (PPC) from the payment of the 10% value-added tax (VAT) on the interest on its loans with Equitable PCIBank. It is represented that paragraph 2, Section 14, Article III of Republic Act No. 7354, otherwise known as "An Act Creating the Philippine Postal Corporation," provides: " All obligations entered into by the Corporation and any income derived therefrom, including those contracted with private banking and financial institutions, shall be exempt from all taxes on both principal and interest "; that it is Equitable PCIBank's contention that PPC is only exempt from paying direct taxes; that since the VAT is an indirect tax, PPC is not exempt from paying the same; that you believe that since the law makes no distinction, no distinction should be made and that under said section of R.A. No. 7354, there is no distinction as to what kind of tax PPC is exempted from paying; that among the Policy and Objectives of R.A. No. 7354, under Section 3 thereof, is " to enable the economical and speedy transfer of mail and other postal matters, from sender to addressee . . . " and " to ensure that sufficient revenues are generated by and within the industry . . . "; that you further opine that subjecting the loans obtained by PPC to VAT would not ensure economy of postal service as the VAT imposed on PPC would only be charged to the mailing public through higher postal rates and that generation of sufficient revenues would be illusory as substantial income generated by PPC would only go to taxation, therefore tax exemption is more in keeping with the policy and objectives of R.A. No. 7354. AcIaST In reply, please be informed that pursuant to Section 5 of Republic Act No. 8424, otherwise known as the Tax Reform Act of 1997, as implemented by Revenue Regulations No. 18-99, as further amended by Revenue Regulations No. 12-2003, services rendered by financial institutions is subject to value-added tax (VAT) beginning January 1, 2000. The output tax (VAT) on the services rendered by financial institutions for financial intermediation shall be computed by multiplying the gross receipts from financial intermediation services by 10%. Pursuant to Section 4 of the above Regulations, if you are a VAT-registered person, you are entitled to claim the output tax (VAT) paid by your bank as input tax credit provided that your claim must be supported by a VAT receipt/invoice. If you are not a VAT-registered person, the VAT passed on to you shall form part of your cost. Moreover, the VAT is an indirect tax, payable by the seller and not by the purchaser of goods or services. Being an indirect tax, the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services (Section 105, Tax Code of 1997). Once shifted, it is no longer a tax but an additional cost which the purchaser has to pay to obtain the goods or services ( Philippine Acetylene Co. vs. Commissioner of Internal Revenue , G.R. No. L-19707, August 17, 1967). On the other hand, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984, and October 14, 1984, respectively, withdrew the tax and duty exemption privileges, including the preferential tax treatment, of government-owned or controlled corporations and all other units of government and private entities. Corollary to this, Executive Order No. 93 effective March 10, 1987 withdrew all tax and duty incentives granted to government and private entities. Pursuant to Section 27(C) of the same Tax Code, only the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR) shall be exempt from income tax (cited in BIR Ruling No. 74-98 dated May 24, 1998). Thus, the privileges enjoyed by PPC as provided for under Section 14, Article III of R.A. No. 7354 were already withdrawn pursuant to the above laws. ASHEca Based on the foregoing, your request for exemption from the payment of the 10% value-added tax (VAT) on the interest on your loans is hereby denied for lack of legal basis. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group