MegaEast Properties, Inc.

May 23, 2008 BIR RULING [DA-314-08] 106; 108; RR 15-06 MegaEast Properties, Inc. Level 1, Annex, Sta. Lucia East Grand Mall Marcos Hi-way cor. Felix Avenue Cainta, Rizal Attention: Mr. Bobby S. Gonzales President Gentlemen : This refers to your letter dated March 12, 2008 requesting, in effect, clarification relative to the imposition of value-added tax (VAT) on the marketing services rendered by MEGAEAST PROPERTIES, INC. ("MegaEast" for brevity) to its clients who are engaged in the real estate business. As represented, MegaEast is a marketing company presently engaged in selling residential lots and houses and lots owned by its clients who are engaged in the real estate business; that for properties that MegaEast sold, with contract price above 1.5 Million Pesos (for lot) and above 2.5 Million Pesos (for house and lot), MegaEast is being paid of its marketing fees plus the corresponding VAT; that the VAT due on the sale of realty is remitted by MegaEast to the BIR; that for those properties sold below the threshold amount of 1.5 Million Pesos (for lot) and above 2.5 Million Pesos (for house and lot), there is no VAT paid, hence, no VAT is remitted to the BIR; and that for other clients of MegaEast who are non-VAT registered, MegaEast is paid its marketing fees without the VAT. We reply as follows: This Office finds it necessary to distinguish and categorize the transactions obtaining in the above situation for purposes of imposition of the VAT. Firstly, the sale of realty (residential lots and houses and lots) by MegaEast for the account of its clients, the owners-developers; and, secondly, the rendition of service by MegaEast as the marketing agent of said developers. 1) VAT on sale of real properties Section 4.106-1 of Revenue Regulations (RR) No. 16-2005, as amended, 1 provides, viz. : "SEC. 4.106-1. VAT on Sale of Goods or Properties. VAT is imposed and collected on every sale, barter or exchange, or transactions "deemed sale" of taxable goods or properties at the rate of twelve percent (12%) 2 (starting February 1, 2006) of the gross selling price 3 or gross value in money of the goods or properties sold, bartered or exchanged, or deemed sold in the Philippines." 4 On the other hand, Section 4.109-1 (p) of RR 16-2005, as amended, provides, viz. : "SEC. 4.109-1. VAT-Exempt Transactions. xxx xxx xxx (P) The following sales of real properties are exempt from VAT, namely: xxx xxx xxx (4) Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and below, or house & lot and other residential dwellings valued at Two Million Five Hundred Thousand Pesos (P2,500,000.00) and below where the instrument of sale/transfer/disposition was executed on or after July 1, 2005; . . . ." Conversely, the sale by MegaEast of real properties owned by its clients, the owners-developers, the consideration of which exceeds the threshold of 1.5 Million Pesos, for the sale of residential lot, and 2.5 Million Pesos, for the sale of house and lot and other residential dwellings, 5 is subject to the 12% VAT. Accordingly, the liability to pay the 12% VAT imposed on the sale of the afore-mentioned real properties rests with the clients of MegaEast, the owners-developers. However, since MegaEast is tasked to remit the VAT imposed thereon to the BIR, it should therefore clearly indicate that it is paying the VAT for the account of its clients and that it acted only for and on their behalf. In that case, the names and Tax Identification Numbers (TINs) of the corresponding owners-developers should properly be indicated in the VAT return. 2) VAT on rendition of service The rendition of service by MegaEast as the marketing agent of its clients, the owners-developers, is subject to VAT imposed under Section 4.108-1 of RR 16-2005, as amended, which provides, viz. : "SEC. 4.108-1. VAT on the Sale of Services and Use or Lease of Properties. Sale or exchange of services, as well as the use or lease of properties, as defined in Sec. 108(A) of the Tax Code shall be subject to VAT equivalent to twelve percent (12%) of the gross receipts (excluding VAT) starting February 1, 2006. (As amended by RR 04-07, effective April 6, 2007) The term 'sale or exchange of services' is defined under Section 4.108-2 of RR 16-2005, as amended, to include those performed or rendered by stock, real estate, commercial, customs and immigration brokers. As above stated, the VAT imposed on the sale of services, such as those of real estate brokers, shall be based upon the gross receipts derived from such sale or exchange of services. The term "gross receipts" has been defined under the last paragraph of Section 108 (A) as the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposit and advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding VAT. In the case of MegaEast, a value-added tax at the rate of 12% shall be imposed on the gross commission or service fee it charges to its clients, the owners-developers, for marketing the real estates belonging to them irrespective of whether the property sold is subject to VAT or VAT-exempt. Thus, if in the service contract executed by and between MegaEast and its clients, MegaEast receives purely commission income, the gross amount received as commission shall be treated to be VAT inclusive. Consequently, 12% thereof shall be considered as its output VAT from which it may off set, all the input taxes it derived from its purchases of goods and services. 6 The net output VAT shall be paid to the BIR by MegaEast on the taxable quarter the commission was actually or constructively received. 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 Footnotes 1. Revenue Regulations implementing Title IV of the Tax Code, as well as other provisions pertaining to VAT. 2. The VAT rate was increased from 10% to 12% beginning February 1, 2006, pursuant to the provisions of R.A. 9337, and was announced in RMC 7-06 dated January 31, 2006. 3. The term 'gross selling price' means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, excluding the VAT. 4. As amended by RR 04-07, effective April 6, 2007. 5. Threshold for VAT-exempt sale of residential lots, house and lot, and other residential dwellings under 109 (P) R.A. 9337, as implemented by RR 16-2005, as amended. 6. Input taxes derived from purchases of goods, such as office supplies and equipments, and from services availed in connection of its business, i.e., janitorial and messengerial services and advertising services.