Floro A. Calibara

July 27, 2007 BIR RULING [DA-427-07] Sec. 108 (A), NIRC; RMC 7-2006 Floro A. Calibara Lot 23 Block 41 Scarlet St. Bonita Homes, Concepcion II, Marikina City S i r : This refers to your letter dated April 26, 2006 requesting for clarification from this Office regarding the imposition of the applicable VAT rate on a Contract of Lease with your lessee. It is represented that you own property in Marikina City which is currently being leased from you by Zancia 49, (" Zancia ", for brevity) a 24-hour general merchandising store. Under the terms of your Contract of Lease, the rental amount for the premises is EIGHTY EIGHT THOUSAND PESOS (PHP88,000.00) per month, exclusive of 10% VAT and other taxes for a period of six (6) years. Before the start of each rental year period, Zancia delivers to you a set of twelve (12) checks representing the monthly payments of the rental year net of 10% VAT and withholding tax. It is further represented that last October 2005, Zancia delivered to you 12 checks to cover its monthly rent from November 2005 to October 2006. At the time of Zancia's delivery of the checks, the applicable rate of VAT was 10%. However, with the increase of the VAT rate to 12% on February 1, 2006, you now seek clarification as to whether the new 12% rate would apply to Zancia's rental payments to you on or after February 1, 2006. In addition, you would like this Office to address the issue of whether or not Zancia can be made to pay an additional 2% VAT as it apparently refuses to shoulder such increase, claiming this is not provided for in its contract. SDAaTC In reply, please be informed that Section 108 (A) of the Tax Code of 1997, as amended by Republic Act (RA) No. 9337, states that: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%)." xxx xxx xxx From the foregoing provision, it is clear that any lease of properties is subject to 10% VAT as well as a 2% VAT increase by order of the President upon the occurrence of the abovementioned conditions. In this regard, the effectivity of the new 12% VAT rate was implemented on February 1, 2006 pursuant to Revenue Memorandum Circular (RMC) No. 7-2006. The fact that Zancia delivered all 12 checks to you on October, 2005 does not entitle it to avail of the old 10% VAT rate for all of them for that year. It is evident that each of the 12 checks only pays Zancia's rent for a particular month. As such, Zancia's checks that are payable on or after February 1, 2006 for the lease of your property are subject to the new 12% VAT rate, in accordance with Section 108 (A) of the same Tax Code. DaEcTC Neither is there any merit in Zancia's contention that since there is no mention of any VAT increase in its Contract of Lease, it is not obligated to pay this additional amount. It is an elementary axiom in our legal jurisdiction that Philippine laws form part of each and every contract between parties. The fact that Zancia's contract with you does not contain any provision for a 2% VAT increase does not operate to exempt it from the new 12% VAT rate, especially when its liability for this rate is clearly provided for under Section 108 (A) of the same Tax Code. AcSCaI In addition, VAT is an indirect tax by nature, meaning, that although direct liability to pay this tax to the Government falls on the sellers of goods and services, they may nevertheless pass it on to their consumers as part of the cost of the goods/services sold. The Supreme Court upheld this interpretation in the case of ABAKADA vs. Ermita (G.R. No. 168056, dated September 1, 2005) where it explained VAT's indirect nature in the following words: xxx xxx xxx "The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or properties and services. Being an indirect tax on expenditure, the seller of goods or services may pass on the amount of tax paid to the buyer, with the seller acting merely as a tax collector. The burden of VAT is intended to fall on the immediate buyers and ultimately, the end-consumers." xxx xxx xxx Accordingly, there is absolutely no basis for Zancia to exempt itself from 12% VAT on its rental payments on or after February 1, 2006 for the lease of your property. As discussed above, you, as a lessor of property, are entitled to pass on this new VAT rate to Zancia who should, in turn, consider such rate as part of the cost of the property being leased. 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