BIR Ruling [DA-533-04]

October 25, 2004 BIR RULING [DA-533-04] S.105 039-03/9-24-03 BPI Rental Corporation 8th Floor, BPI Building, Ayala Avenue cor. Paseo de Roxas Makati City Attention: Danilo T. Reyes Vice President Gentlemen : This refers to your letter dated August 20, 2004 seeking to confirm your opinion that BPI RENTAL CORPORATION (BRC for brevity) is subject to value-added tax (VAT for brevity) based on the following facts: BRC, which will be established as a wholly owned subsidiary of BPI Leasing Corporation, a domestic corporation organized under Philippine laws, will have the following primary purpose: "To engage in the business of renting, leasing (excluding financial leases), and hiring of all kinds of machineries and equipment, automotive equipment, automobiles, vans, pick-ups, trucks, tractors, trailers, buses, ships, vessels, aircrafts, motorcycles, all kinds of motor vehicles, regardless of engine size and displacement, and all kinds of land, air or water transportation system." Therefore, BRC will be considered an ordinary service company engage in operating lease of various real and personal properties and hence, subject to the 10% VAT on its gross receipts. In reply, please be informed that Sections 105 and 108 (A) of the 1997 Tax Code, as amended and as implemented by Revenue Regulations No. 7-95, provides that: "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." (Emphasis supplied.) "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 . cSCTEH The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; . . .; lessors of property, whether personal or real ; . . . The phrase 'sale or exchange of services' shall likewise include: xxx xxx xxx (2) The lease or the use of, or the right to use of any industrial, commercial or scientific equipment ; xxx xxx xxx Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. xxx xxx xxx" (Emphasis supplied) In the case of Commissioner of Internal Revenue vs. Court of Appeals and Commonwealth Management and Services Corporation, G.R. No. 125355, March 30, 2000 (329 SCRA 237) , cited in VAT Ruling No. 039-03 dated September 24, 2003; the Supreme Court ruled, among others, that every person who sells, barters, or exchanges goods and services, in the course of trade or business, as defined by law, is subject to VAT and that as long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. It is clear under Section 108 (A) of the 1997 Tax Code, as amended, that the phrase "sale or exchange of services" covers services for a fee, remuneration, or consideration performed or rendered by lessors of property, whether personal or real. Accordingly, this Office hereby confirms your opinion that BRC will be considered an ordinary service company engage in operating lease of various real and personal properties subject to the 10% VAT on its gross receipts. Moreover, this Office is of the opinion that BRC is neither a financial institution nor a finance company. Section 2.7 of Revenue Regulations No. 9-2004 dated June 21, 2004, implementing Republic Act No. 9238, which took effect on January 1, 2004, defines financing companies as follows: "2.7. Financing Companies shall refer to corporations except banks, investment houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivables, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable properties (R.A. No. 5980 as amended by R.A. 8556)." (Emphasis supplied.) It is noteworthy to state that BRC's purposes are not similar to the aforesaid purposes of a financing company and hence not covered by Revenue Regulations No. 9-2004, which imposes the gross receipts tax on financing companies effective January 1, 2004. It must be stressed that BRC will engage in an operating lease, not financial leasing, of movable and immovable properties. An "operating lease" is defined in Section 2.9 of Revenue Regulations No. 9-2004 as a " lease other than a finance lease of a finance company ." 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, then this ruling shall be considered void. aDTSHc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group