Cayetano A. Geli

March 9, 2007 BIR RULING [DA-150-07] VAT Ruling No. 018-99 Secs. 109 (q), 109 (v), 116, NIRC Cayetano A. Geli 1325 Manuel dela Fuente St. Sampaloc Manila S i r : This refers to your letter dated January 18, 2007, requesting this Office's opinion on whether or not ADEL-GELI Apartment's income as a lessor is subject to percentage tax. It is represented that your mother, Paz Adel Geli, is engaged in the business of leasing apartments and is registered under the trade name ADEL-GELI Apartment ("ADEL-GELI" , for brevity); that it is also registered with BIR Revenue District Office No. 32 as a non-VAT taxpayer and that ADEL-GELI owns and is currently leasing out a four-door apartment building earning annual receipts of less than Four Hundred Thousand Pesos (P400,000.00) located at Laonglaan, Sampaloc, Manila. You were advised last June 2002 that there is no need to pay percentage tax on ADEL-GELI's activities as a lessor under Sections 109(z) and 116 of the Tax Code of 1997, as amended, based on Section 109 (z) of the same Tax Code and a May 15, 2002 ruling from the Regional Director of BIR Revenue Region No. 6. Following such advice, ADEL-GELI filed for and paid all accruing percentage taxes only on those rental receipts that exceeded Eight Thousand Pesos (P8,000.00) only since 2002. However, last December 2006, an examiner from BIR RDO No. 32 informed you that all leases of residential properties are subject to percentage tax regardless of the amount of the monthly rental. CEDScA You now seek clarification from this Office with respect to whether ADEL-GELI's income (P8,000.00 per unit monthly, with a total annual income of less than P400,000.00) from the lease of its 4-door apartment building in Sampaloc, Manila is subject to percentage tax. In reply, please be informed that Section 116 of the Tax Code of 1997, as amended by Republic Act No. 9337, provides that: "SEC. 116. Tax on Persons Exempt From Value-Added Tax (VAT) . Any person whose sales or receipts are exempt under Section 109(V) of this Code from the payment of value-added tax and who is not a VAT-registered person shall pay a tax equivalent to three percent (3%) of his gross quarterly sales or receipts: Provided, That cooperatives shall be exempt from the three percent (3%) gross receipts tax herein imposed." The above provision must be read in connection with Section 109 (Q) and (V) of the same Tax Code which provides that: "SEC. 109. Exempt Transaction . (1) Subject to the provisions of subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx xxx xxx (Q) Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P10,000.00) Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO); xxx xxx xxx (V) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000.00): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO):" It is clear that under the above provisions, the 3% percentage tax will only apply to persons whose sales or receipts are VAT-exempt under Section 109 (V) of the same Tax Code and are registered with the BIR as non-VAT entities. In this regard, considering that ADEL-GELI leases its apartment units at P8,000.00 per unit monthly, it qualifies for VAT exemption under Section 109 (Q) of the Tax Code and not Section 109 (V). As shown above, the former Section expressly provides that leases of residential units with a monthly rental not exceeding Ten thousand pesos (P10,000.00) are not subject to VAT. Thus, ADEL-GELI is not subject to either VAT or percentage tax in leasing the abovementioned 4-door apartment building in Sampaloc, Manila. SAEHaC 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service