NE Pacific Shopping Centers Corporation

February 19, 2007 BIR RULING [DA-109-07] EWT; VAT DA 076-2006 NE Pacific Shopping Centers Corporation 111 Maharlika Highway, Cabanatuan City 3100 Attention: Ms. Arlene Abaquita Financial Consultant Gentlemen : This refers to your letter dated February 27, 2006 requesting confirmation of your opinion that: 1. The monies received by NE Pacific Shopping Centers Corporation (NEPSCC) from its tenants as payments for direct utilities and services are not subject to Value-Added Tax (VAT) and Expanded Withholding Tax (EWT). 2. The monies received by NEPSCC from its tenants as payment for Common Usage and Service Area (CUSA) expenses and other related expenses are not subject to VAT and EWT. It is represented that NEPSCC is a corporation organized primarily to deal and engage in real estate business and to finance the construction and development of shopping mall complexes and commercial centers, as well as to operate and manage shopping mall complexes and commercial centers, including such establishments as are normally found therein such as cinema houses, bowling lanes, amusement centers and other facilities. It has its principal place of business at the 111 Maharlika Highway, Cabanatuan City 3100 and is registered with the BIR under TIN No. 005-153-519-000. It is leasing commercial spaces at NE Pacific Mall at Maharlika Highway, Cabanatuan City. As an incident to the operation of its business, NEPSCC incur common usage and service area expenses, including but not limited to electricity/light, water, chilled water, common usage & service area (CUSA) security and janitorial, preventive maintenance of exhaust ducts, repairs of panel board, grease trap maintenance, repairs and maintenance for air handling unit (AHU) and fan coil unit (FCU), fogging, pest control, air condition charges, fan coil repairs, back up security and all other related expenses. As an industry practice, these expenses are billed by the utility or service providers (i.e. Meralco, Maynilad, NEPSCC's contractors) in which case NEPSCC will issue a billing statement to its tenants to charge the above expenses at cost on a pro-rata basis. In the case of direct utilities and services, these are expenses directly attributable to the tenants, i.e. , repairs and maintenance ascribed to tenants' stalls. The contractor for the repairs will send a statement of account to NEPSCC for the services rendered. In turn, NEPSCC will issue a billing statement to that tenant for the expense incurred. In the case of electricity/light and water, NEPSCC maintains a mother meter which indicates the total utility consumption to be paid by NEPSCC for a certain period. NEPSCC would initially advance the payment to the utility companies and would then subsequently issue a billing statement to its tenants using the individual sub-meters maintained by each tenant as basis. The utility charges paid are allocated to each tenant based on actual consumption, but nonetheless do not constitute money or income received by NEPSCC. CTcSIA In reply, please be informed that the monies received by NEPSCC from its tenants as payments for direct utilities and services are not subject to Value Added Tax (VAT) and Expanded Withholding Tax (EWT). Reimbursement of expenses, by its very nature, is not income but merely a return of capital. As a return of capital, it is not income payment per se . Such being the case, it is not subject to income tax. In the case at hand, the expenses directly and indirectly attributable to NEPSCC's tenants are billed to them depending on their levels of consumption. These amounts are actually payments for such direct and indirect expenses. As such, they are not income payments subject to tax. In reimbursement-at-cost transactions, expenses which are incurred by the advancing party for the benefit and for the account of the party accommodated, can be considered reimbursable expenses not forming part of gross receipts of the advancing party subject to tax. Since the party seeking reimbursement does not sell, barter, exchange, nor lease any food or property and neither does it render any service to the party accommodated, the reimbursement transactions are not subject to VAT (VAT Ruling No. 026-97 dated April 1, 1997). The mere collection of purely reimbursable costs billed, for instance, in the name of a client but collected through a broker or agent shall not be subject to VAT provided that such fact of reimbursement is clearly shown in the billing and/or official receipt (VAT Ruling No. 048-97 dated July 11, 1997) and being reimbursement of expenses without any mark-up or profit element (BIR Ruling No. 001-90 dated January 4, 1990) and not charges for services, should not be considered as part of gross receipts for purposes of the expanded withholding tax. (BIR Ruling No. 129-92 dated April 20, 1992) DAaHET In view of all the foregoing, this Office is of the considered opinion that receipt, of mere reimbursement of cost with no mark-up or profit element of utility charges paid in behalf and for the account of the stall owners/tenants and not being charges for sale of goods or services, shall not form part of NEPSCC's gross income subject to the EWT and the 12% VAT. Accordingly, your opinion that the monies received by NEPSCC from its tenants as payment for Common Usage and Service Area (CUSA) expenses and other related expenses are not subject to VAT and EWT is hereby confirmed. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it is ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service