BIR Ruling [DA-473-03]

December 10, 2003 BIR RULING [DA-473-03] Secs. 105 & 108 DA-404-98 Megal Development Corporation 2008 EDA Extension cor. Taft Avenue Pasay City Attention: Ms. Many V. Mojica Accountant Gentlemen : This refers to your letter dated September 26, 2000 stating that you are a VAT-registered corporation engaged in the business of renting out commercial and residential units; and that your tenants, a Rural Bank and a Regional Office, claim that they should not be charged with VAT on their rental of real property on the ground that they are exempt from tax based on a ruling issued in their favor. Based on the foregoing, you are requesting for a ruling on the following: "1. The lessor is NOT also liable to pay Value-Added Tax on the proceeds of the services being rendered to these VAT Exempt Entities? "2. On the residential units with rentals of Eight thousand pesos (P8,000.00) per month, (which is also VAT exempt) are we, as lessor also exempt to pay VAT on such receipts? "3. On the case of the Rural Bank, what is the ruling? "4. Are we liable to pay percentage tax instead? In reply, please be informed that as lessor of commercial and residential units, Megal Development Corporation is liable to the payment of VAT based on gross receipts under Section 108 of the Tax Code of 1997. However, being an indirect tax, the amount of VAT payable may be passed on to the tenants, i.e. , Rural Bank and Regional Office pursuant to Section 105 of the same Code which provides, viz : "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 . The value-added tax is an indirect tax and the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. xxx xxx xxx" (Emphasis supplied.) The alleged exemption from tax of your tenants covers only taxes for which they are directly liable and does not extend to indirect taxes, like VAT and percentage taxes. In short, your tenants, Rural Bank and Regional Office, can be held liable to pay the VAT which may be included in your rental billings to them. TaSEHD You are exempt from VAT on your lease of residential units with monthly rental of P8,000.00 pursuant to Section 109(x) of the Tax Code of 1997 and from the 3% percentage tax imposed under Section 116 of the same Code. This ruling is being issued on 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group