BIR Ruling [DA-435-03]

December 3, 2003 BIR RULING [DA-435-03] 105; 109 (d) DA-513-99; VAT 208-90 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr. J.A. Osana Tax Division Gentlemen : This refers to your letters dated January 21, 2000 and March 12, 2001 requesting for confirmation of your opinion that under Section 105 of the Tax Code of 1997, the acquisition by your client, Monsanto Philippines, Inc . (MONSANTO) of the assets and receivables of Agroseed Corporation (AGROSEED) is exempt from the value-added tax (VAT). It is represented that MONSANTO and AGROSEED are corporations duly organized and existing under and by virtue of the laws of the Republic of the Philippines; that AGROSEED was incorporated on October 24, 1998 resulting from a spin-off of Cargill Philippines, Inc. (CARGILL)'s business; that AGROSEED is primarily engaged in the business of trading of goods, particularly seeds, on a wholesale basis and is registered as a Non-VAT person; that MONSANTO, on the other hand, is engaged in the business of manufacturing and sale of agro-chemicals; that in 1998, AGROSEED acquired certain assets from CARGILL in exchange of its shares of stocks; that the transaction between AGROSEED and CARGILL resulted to a tax deferral scheme as CARGILL acquired control over AGROSEED as a consequence of the transaction; that the assets which AGROSEED previously acquired from CARGILL are now subject of sale between AGROSEED and MONSANTO; that the sale between AGROSEED and MONSANTO consist of the following: 1. Trade and non-trade receivables; THEDCA 2. Inventories; 3. Property and equipment; 4. Deferred tax assets; and 5. Prepaid expenses. In reply, please be informed that Section 105 of the Tax Code of 1997 provides; "SEC. 105. Persons liable . 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 shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. "xxx xxx xxx "The phrase `in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. "xxx xxx xxx From the foregoing, it is clear that VAT is imposed on the sale, barter or exchange of goods, properties or services in the course of trade and business, including transactions incidental thereto. However, AGROSEED's sale of trade and non-trade receivables, property and equipment, deferred tax assets and prepaid expenses to MONSANTO cannot be said to be a taxable sale of goods or properties in the course of trade or business as contemplated under Section 105 of the Tax Code of 1997 because the sale is an isolated transaction. If the regular activity is exempt from VAT, it follows that the incidental transactions are also exempt. The sale, although may qualify as a transaction incidental to the regular trade or business of AGROSEED, the regular business is in itself exempt from VAT (sale of seed) pursuant to Section 109 of the Tax Code. (BIR Ruling No. DA 513-99 dated September 3, 1999; VAT Ruling No. 208-90 dated November 15, 1990) Considering that, as represented, what CARGILL transferred to AGROSEED are its assets related to its sale of seeds, no VAT is due thereon. Moreover, the transfer of inventories consisting of seeds is not subject to 10% VAT, because these products are clearly and unequivocably exempted from VAT pursuant to Section 109(d) of the Tax Code. 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. Furthermore, this ruling disposes of the VAT issues requested and does not cover any income tax aspect to which the above transactions may be subject to. HEcSDa Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group