BIR Ruling [DA-297-05]

July 1, 2005 BIR RULING [DA-297-05] S.106 (B); VAT Ruling No. 049-90 dated February 20, 1990 SGV & Co . 6760 Ayala Avenue Makati City Attention: Atty. J.A. Osana Tax Division Gentlemen : This refers to you letter dated March 29, 2005 requesting on behalf of your client, The Philippine American Life and General Insurance Company (Philamlife for brevity), confirmation that the transfer of certain properties by Philamlife to its employees' duly qualified retirement fund shall not be subject to the value-added tax (VAT for brevity). The facts, as you represent, are as follows: Philamlife is a domestic corporation with office address at the 4th Floor, Philamlife Building, UN Avenue, Ermita, Manila. It is duly authorized to transact both life and non-life insurance business in the Philippines. It owns the Philamlife Tower building that it presently leases out. Philamlife maintains a trusteed retirement plan, Philamlife Employees Retirement Fund (PERF for brevity), a duly qualified retirement plan under Section 32(B)(6)(a) of the 1997 Tax Code. As of January 1, 2003, the actuarial valuation report indicated that total past service costs and current liabilities of Philamlife to the retirement plan amounts to P679,579,500. To fund the retirement plan, Philamlife contributed to PERF 4 1/2 floors of the Philam Tower with book value of P400M. You now seek confirmation that the transfer of the property by Philamlife to PERF shall not be subject to VAT. In reply, please be informed that VAT is imposed and collected on every sale, barter, or exchange of taxable goods or properties made in the course of business at the rate of 10% of the gross selling price. The transfer of the subject property by Philamlife to PERF by way of contribution is not a sale, barter or exchange of taxable goods or properties made in the course of business. The New Civil Code defines a contract of sale and barter or exchange as follows: "ART. 458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing and the other to pay therefore a price certain in money or its equivalent. xxx xxx xxx ART. 1638. By the contract of barter or exchange one of the parties binds himself to give one thing in consideration of the other's promise to give another thing." TaCDcE Based on the above definitions, there is no sale, barter or exchange to speak of in this case that will give rise to VAT. There is no obligation on the part of PERF to "pay therefor a price certain in money or its equivalent . " Neither is the transaction covered by the "deemed-sale" provision of the Tax Code of 1997 under Section 106(B). The said section enumerates specifically the following transaction, which shall be deemed sale: (1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business; (2) Distribution or transfer to: (a) Shareholders or investors as share in the profits of the VAT-registered persons; or (b) Creditors in payment of debt; (3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and (4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. The contribution of property by Philamlife to PERF certainly does not fall within paragraphs (3) and (4) of Section 106 (B). Moreover, paragraph (1) referring to transfer, use, or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business does not also apply. Revenue Regulations No. 5-87 as amended by Revenue Regulations No. 7-95 mentions only one instance when paragraph (1) of Sec 106 (B) can take place, and that is when the VAT-registered person withdraws goods from his business for his personal use. The import of the first paragraph of a "deemed sale" transaction has been previously discussed by this Office in VAT Ruling No. 049-90 dated February 20, 1990 which involved the use by lumber company of lumber produced in its own plant for the repair of its administrative building. In the said ruling, this Office held that: "a. The lumber of your own manufacture and used to repair your company's administration building is not embraced by the "deemed sale" transaction under the provisions of Sec. 100(b)(1), NIRC, as implemented by Sec. 4(a), Rev. Regs. No. 5-87. Under the law, to be, considered a "deemed sale" transaction, the "transfer, use or consumption of goods" by the person himself must be " not in the course of business".Since the Company's use and consumption thereof is in the course of its business, (i.e.,to repair its administration building),the said usage and consumption is not constituted as a deemed sale transaction of the Company, hence, not subject to the 10% VAT." Applying the same principle in the instant case, the contribution by Philamlife of its property to meet the funding requirement of its employees' retirement plan cannot be considered as withdrawal or consumption of goods for personal use. In fact, such contribution made pursuant to a BIR-qualified employees' retirement plan is considered as an ordinary and necessary business expense allowed as tax deduction. Similarly, paragraph (2) pertaining to transfer to creditors in payment of debt or obligation will not apply in this case. With respect to the contribution, the PERF cannot be considered as a creditor and Philamlife as debtor. In view of the foregoing, this Office opines and hereby confirms that the contribution by Philamlife of 4 1/2 floors of Philam Tower to PERF, its employees' duly qualified retirement fund, is not a deemed sale, hence, not subject to the VAT. However, any input VAT pertaining to the 4 1/2 floors of Philam Tower should not be claimed as input tax for any future transactions subject to VAT. 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group