BIR Ruling [DA-146-05]

April 12, 2005 BIR RULING [DA-146-05] To The Regional Director Revenue Region No. 16 Cagayan de Oro City Gentlemen : This refers to your indorsement dated September 4, 2003 Re: letter dated August 21, 2003 of the Revenue District Officer, Revenue District No. 97, Gingoog City, concerning the assessment of deficiency value-added tax (VAT) in the total amount of P192,304.95 against Prudential Pawnshops, Inc . for taxable year 2000 which the taxpayer objected to, by citing the case of Prime Asia Pawn and Jewelry Shop, Inc. vs. Commissioner of Internal Revenue (CTA Case No. 6304) decided by the Court of Tax Appeals which held that pawnshops are not subject to VAT. Please be informed that the issue of whether pawnshops are subject to the 10% value-added tax (VAT) is still pending with the Supreme Court. Nevertheless, in several cases decided by the Court of Appeals involving the same issue, the latest of which is the case of Commissioner of Internal Revenue vs. Exquisite Pawnshop and Jewelry, Inc . promulgated on May 13, 2003 (CA-G.R. SP. No. 70319), the Court said, viz : "Elementary is the rule in statutory construction, that when laws or rules are clear, application and not interpretation thereof is imperative. In the instant case, the law is clear and leaves no room for its interpretation. Section 105 of the National Internal Revenue Code (NIRC) subjects 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 to a value-added tax (VAT). While Section 108 of the National Internal Revenue Code of 1997 defines the phrase 'sales of services' as the performance of all kinds of services or others for a fee, remuneration or consideration.' It includes the services enumerated in the aforementioned section and similar services regardless of whether or not the performance thereof calls for the exercise or use of physical or mental faculties. The wordings of the definition of the phrase `sale or exchange of services' is unambiguous. It encompasses the performance of all kinds of services for a fee, remuneration or consideration. Thus, the sale or exchange of services is subject to 10% VAT. Indeed, for as long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. Section 3 of Presidential Decree No. 114 defines a pawnshop thus: `Pawnshop shall refer to a person or entity engaged in the business of lending money on personal property delivered as security for loans.' From the foregoing definition, the fact that, the principal activity of a pawnshop is lending money at interest on the security of personal property is instantly recognizable. Needless to state, the act of lending money at interest constitutes a performance of a service for a fee, remuneration or consideration. DIHETS The phrase 'all kinds of services' as stated in the second paragraph of Section 108(A) of Republic Act No. 8424 is broad enough to cover the kind of service which is provided by pawnshops to their borrowers, that is, lending money in consideration of personal property delivered as security. Hence, a pawnshop is engaged in the sale of services that is subject to VAT under Section 108(A) of the Tax Code, although it is not specifically mentioned in the law. Clearly then, pawnshops are subject to value-added tax. The respondent argues that pawnshop is not among those entities enumerated as subject to VAT, hence it is excluded from VAT coverage under the principle of ' expressio unius est exclusio alterius '. However, the rule of ' expressio unius est exclusio alterius ' does not apply in the instant case. The said maxim should be applied only as a means of discovering legislative intent and should not be permitted to defeat the plain indicated purpose of the legislature. It does not apply when words are mentioned by way of example or to remove doubts. From the wordings of Section 108(A) of the NIRC, the legislative intent is not to limit the application of the law to those enumerated therein, nor exclude other kinds of services performed for a fee, remuneration or consideration, because the law speaks of 'all kinds of services''. To limit its application to the enumeration would contradict the very clear meaning of the phrase 'all kinds of services'. The word 'including' used in the law should be construed as a term of enlargement, and not of limitation. A term whose statutory definition declares what it 'includes' is more susceptible to extension of meaning by construction than where the definition declares what a term 'means'. Thus, it has been said that the word 'includes' is usually a term of enlargement, and not of limitation. It, therefore, conveys the conclusion that there are other items includible, though not specifically enumerated.' (Sutherland, Statutory Construction, 4th ed., Vol 24, p. 82, Sec. 47.08) Even assuming that the VAT is imposable only on services performed by persons enumerated in Section 108(A), pawnshops would still be subject to VAT pursuant to the last portion of the said Section 108(A) which included 'similar services regardless of whether or not the performance thereof calls for the exercise or use of physical or mental faculties', in those which are imposed a 10% VAT. The services of pawnshops would fall under 'similar services' inasmuch as their services are similar to those of a lending investor. Both lending investor and pawnshops make a practice of lending money at interest. Moreover, the transactions of pawnshops are not among those enumerated in Section 109 of the Tax Code as exempt from VAT under Section 108(A). If it was indeed the intention of the legislature, as respondent claims, to exclude pawnshops from the imposition of VAT, why was it not included in the enumerated exemptions? Contrary to the claim of the respondent, the legislative intent is to subject pawnshop to VAT, otherwise, it could have included pawnshops among those exempted from VAT. SaCIAE The respondent stresses that it is claiming exclusion and not exemption from the coverage of the value-added tax law. However, it is important to note, that there are no exclusions from VAT, as it is imposed on all kinds of services. There are exemption, though, under Section 109 of the NIRC. Pawnshop transactions, as earlier stated, are not among those exempted. Tax exemptions must be expressly granted in a statute. Here, there is nothing in the statute which explicitly exempts pawnshops from payment of the VAT. WHEREFORE, premises considered, the appealed decision of the Court of Tax Appeals in CTA Case No. 6319 is hereby REVERSED and SET ASIDE, and a new one is entered ORDERING the responded Exquisite Pawnshop & Jewelry, Inc., to pay the amount of P1,607,114.28 as deficiency value-added tax for the year 1997. SO ORDERED." The final construction of statutes rests with the courts and until a final resolution is reached by the Supreme Court to the effect that pawnshops are not subject to VAT, the present stand of the BIR is that the business of a pawnshop is subject to VAT in view of the decision of the Court of Appeals in the case of Commissioner of Internal Revenue vs. Exquisite Pawnshop and Jewelry, Inc . However, effective January 1, 2005, a pawnshop has been classified as a non-bank financial intermediary for purposes of the gross receipts tax (GRT) pursuant to Revenue Regulations (Rev. Regs.) No. 10-2004 and Revenue Memorandum Circular No. 73-2004, further implementing Section 4 of Republic Act No. 9238, and amending Section 4 of Rev. Regs. No. 9-2004. caDTSE Under Section V(3) of RMC No. 73-2004 (copy attached for your reference), collections forming part of gross receipts on or before December 31, 2004 were supposed to have been subjected to VAT, the last payment date of which was January 20/25, 2005, which collection should no longer be subject to the payment of GRT. Advance payments received on or before December 31, 2004 where the services thereof are to be rendered after such date shall not be considered as income earned beginning January 1, 2005 subject to GRT considering that the same has already been subjected to VAT in the previous year. On the other hand, services rendered prior to December 31, 2004, the considerations of which were received thereafter and therefore not reflected in any VAT return filed shall be subject to GRT. Pursuant to Section II of RMC No. 73-2004, pawnshops shall be allowed to settle its VAT for tax years 1996-2002 in accordance with the provisions of and under the conditions contained in RMC No. 37-2004 up to December 15, 2004. Thereafter, pawnshops shall no longer be allowed to settle their VAT liability for tax years 1996 to 2002 under the terms and conditions set forth in said RMC. Please be guided accordingly. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group