BIR Ruling [DA-144-06]

March 17, 2006 BIR RULING [DA-144-06] 109; R.R. 16-2005 Salazar and Associates Tax Consultancy & Legal Services Rms. 201-203 Reza Bldg 1318 Quezon Avenue Quezon City Attention: Atty. Rogelio C. Fermin Partner Gentlemen : This refers to your undated letter requesting for an opinion on behalf of your client, Dormbuilt, Inc. (DBI) whether it is liable or value-added tax (VAT) or the 3% percentage tax. Documents submitted show that DBI is a domestic corporation engaged in the business of operating a dormitory building for male and female students of Dela Salle Health Sciences Campus in Dasmarias, Cavite and is a VAT-registered taxpayer with TIN No. 231-439-614-000. It charges rent for use of its rooms which are lower than P10,000.00/month (or P3,500.00 x 3 occupants = P10,500.00/month). To provide for the needs of the students, DBI also maintains commercial areas and concessionaires whose lease per month is greater than P10,000.00. However, the aggregate of such rentals by DBI from the lease of their building is less than P1,500,000.00 per year. In reply, please be informed that gross receipts from lease of commercial units are subject to the 12% VAT under Sec. 105 of the 1997 Tax Code, as amended by Republic Act (RA) No. 9337, and as implemented by Revenue Regulations (RR) No. 16-2005, as follows: "Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. DcITaC The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. . . . The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity." On the other hand, rental income loan lease of residential units is exempt from the 12% VAT under certain conditions pursuant to Sec. 4.109-1(B)(1) of RR 16-2005: "(q) Lease of residential units with a monthly rental per unit not exceeding Ten Thousand Pesos (P10,000.00), regardless of the amount of aggregate rentals received by the lessor during the year; . . . The foregoing notwithstanding, lease of residential units where the monthly rental per unit exceeds Ten Thousand Pesos (P10,000.00) but the aggregate of such rentals of the lessor during the year do not exceed One Million Five Hundred Pesos (P1,500,000.00) shall likewise be exempt from VAT, however, the same shall be subjected to three percent (3%) percentage tax. In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per unit of not exceeding P10,000.00 while others are leased out for more than P10,000.00 per unit, his tax liability will be as follows: 1. The gross receipts from rentals not exceeding P10,000.00 per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts. aTICAc 2. The gross receipts from rentals exceeding P10,000.00 per month per unit shall be subject to VAT if the aggregate annual gross receipts from said units only (not including the gross receipts from units leased for not more than P10,000.00) exceeds P1,500.000.00, Otherwise, the gross receipts will be subject to the 3% tax imposed under Section 116 of the Tax Code. The term ' residential unit ' shall refer to apartments and houses & lots used for residential purposes, and building or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel rooms. The term ' unit ' shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent." From the foregoing, it can be gleaned that DBI's gross receipts from its rentals not exceeding P10,000.00 per month per unit shall be exempt from VAT regardless of its aggregate annual gross receipts. Its income derived from its dormitory operations exceeding P10,000.00 per month per unit but not exceeding P1,500,000.00 during the year shall be exempt from VAT but subject to the 3% percentage tax. Accordingly, proceeds derived by DBI from its lease of commercial spaces are subject to the 12% VAT. However, the income of DBI from its dormitory operations not exceeding P10,000.00 per month per unit shall be exempt from the payment of VAT. But the gross receipts from such rentals in the amount exceeding P10,000.00 per month per unit where the aggregate thereof during the year do not exceed P1,500,000.00 shall be subject to 3% percentage tax. HATICc This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be 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