BIR Ruling [DA-566-04]

November 9, 2004 BIR RULING [DA-566-04] Sections 108 & 246 BIR Ruling No. DA-185-04 Mr. Jose F. Miranda Agencia Belen 52 Legaspi St. Dumaguete City S i r : This refers to your letter dated October 8, 2002 assailing the validity of Revenue Memorandum Circular No. 45-2001 and raising certain issues. We proceed to rule on the particular issues raised for our consideration: Issue No. 1 : Whether a pawnshop operator is a lending investor subject to VAT and percentage tax. A: The issue of whether pawnshops are considered lending investors for the purpose of imposing the 5% percentage (lending investor's) tax was finally resolved by the Supreme Court on July 15, 2003 in the case of Commissioner of Internal Revenue vs. Michel J. Lhuiller Pawnshop, Inc. (G.R. No. 150947). The High Court held in the said case, viz : " We rule in the negative . xxx xxx xxx Under Section 157(u) of the NIRC of 1986, as amended, the term lending investor includes "all persons who make a practice of lending money for themselves or others at interest." A pawnshop , on the other hand, is defined under Section 3 of P.D. No. 114 as "a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn brokerage." While it is true that pawnshops are engaged in the business of lending money, they are not considered "lending investors" for the purpose of imposing the 5% percentage taxes for the following reasons: First. Under Section 192, paragraph 3, sub-paragraphs (dd) and (ff), of the NIRC of 1977, prior to its amendment by E.O. No. 273, as well as Section 161, paragraph 2, sub-paragraphs (dd) and (ff), of the NIRC of 1986, pawnshops and lending investors were subjected to different tax treatments; thus: (3) Other Fixed Taxes . The following fixed taxes shall be collected as follows, the amount stated being for the whole year, when not otherwise specified: (dd) Lending investors 1. In chartered cities and first class municipalities, one thousand pesos; 2. In second and third class municipalities, five hundred pesos; 3. In fourth and fifth class municipalities, and municipal districts, two hundred fifty pesos: Provided, That lending investors who do business as such in more than one province shall pay a tax of one thousand pesos. xxx xxx xxx (ff) Pawnshops , one thousand pesos Second. Congress never intended pawnshops to be treated in the same way as lending investors. Section 116 of the NIRC of 1977, as renumbered and rearranged by E.O. No. 273, was basically lifted from Section 175 of the NIRC of 1986, which treated both tax subjects differently. Section 175 of the latter Code read as follows: Sec. 175. Percentage tax on dealers in securities, lending investors . Dealers in securities shall pay a tax equivalent to six (6%) percent of their gross income. Lending investors shall pay a tax equivalent to five (5%) percent of their gross income. (As amended by P.D. No. 1739, P.D. No. 1959 and P.D. No. 1994). We note that the definition of lending investors found in Section 157(u) of the NIRC of 1986 is not found in the NIRC of 1977, as amended by E.O. 273, where Section 116 invoked by the CIR is found. However, as emphasized earlier, both the NIRC of 1986 and the NIRC of 1977 dealt with pawnshops and lending investors differently. Verily then, it was the intent of Congress to deal with both subjects differently. Hence, we must likewise interpret the statute to conform with such legislative intent. Third. Section 116 of the NIRC of 1977, as amended by E.O. No. 273, subjects to percentage tax dealers in securities and lending investors only. There is no mention of pawnshops. Under the maxim expressio unius est exclusio alterius , the mention of one thing implies the exclusion of another thing not mentioned. Thus, if a statute enumerates the things upon which it is to operate, everything else must necessarily and by implication be excluded from its operation and effect. This rule, as a guide to probable legislative intent, is based upon the rules of logic and natural workings of the human mind. Fourth. The BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC 43-91 that pawnshops were not subject to the 5% percentage tax imposed by Section 116 of the NIRC of 1977; as amended by E.O. No. 273. This was even admitted by the CIR in RMO No. 15-91 itself. Considering that Section 116 of the NIRC of 1977, as amended, was practically lifted from Section 175 of the NIRC of 1986, as amended, and there being no change in the law, the interpretation thereof should not have been altered. xxx xxx xxx" In view of the foregoing, pawnshop operators are not lending investors. Accordingly, they are not subject to the 5% lending investor's tax. On the other hand, the issue of whether pawnshops are subject to the 10% value-added tax (VAT) is still pending with the Supreme Court. Nevertheless, in several cases decided by the Court of Appeals on the same issue, the latest of which is the case of Commissioner of Internal Revenue vs. Exquisite Pawnshop and Jewelry, Inc. promulgated on May 13, 2003 (CA-G.R. SP. No. 70319), the Court said "Elementary is the rule in statutory construction, that when laws or rules are clear, application and not interpretation thereof is imperative. In the instant case, the law is clear and leaves no room for its interpretation. Section 105 of the National Internal Revenue Code (NIRC) subjects 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). While Section 108 of the National Internal Revenue Code of 1997 defines the phrase 'sales of services' as the 'performance of all kinds of services for others for a fee, remuneration or consideration.' It includes the services enumerated in the aforementioned section and similar services regardless of whether or not the performance thereof calls for the exercise or use of physical or mental faculties. The wordings of the definition of the phrase 'sale or exchange of services' is unambiguous. It encompasses the performance of all kinds of services for a fee, remuneration or consideration. Thus, the sale or exchange of services is subject to 10% VAT. Indeed, for as long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. Section 3 of Presidential Decree No. 114 defines a pawnshop thus: 'Pawnshop shall refer to a person or entity engaged in the business of lending money on personal property delivered as security for loans.' From the foregoing definition, the fact that, the principal activity of a pawnshop is lending money at interest on the security of personal property is instantly recognizable. Needless to state, the act of lending money at interest constitutes a performance of a service for a fee, remuneration or consideration. The phrase 'all kinds of services' as stated in the second paragraph of Section 108(A) of Republic Act No. 8424 is broad enough to cover the kind of service which is provided by pawnshops to their borrowers, that is, lending money in consideration of personal property delivered as security. Hence, a pawnshop is engaged in the sale of services that is subject to VAT under Section 108(A) of the Tax Code, although it is not specifically mentioned in the law. Clearly then, pawnshops are subject to value-added tax. The respondent argues that pawnshop is not among those entities enumerated as subject to VAT, hence it is excluded from VAT coverage under the principle of ' expressio unius est exclusio alterius '. However, the rule of ' expressio unius est exclusio alterius ' does not apply in the instant case. The said maxim should be applied only as a means of discovering legislative intent and should not be permitted to defeat the plain indicated purpose of the legislature. It does not apply when words are mentioned by way of example or to remove doubts. CAScIH From the wordings of Section 108(A) of the NIRC, the legislative intent is not to limit the application of the law to those enumerated therein, nor exclude other kinds of services performed for a fee, remuneration or consideration, because the law speaks of 'all kinds of services'. To limit its application to the enumeration would contradict the very clear meaning of the phrase 'all kinds of services'. The word 'including' used in the law should be construed as a term of enlargement, and not of limitation. A term whose statutory definition declares what it 'includes' is more susceptible to extension of meaning by construction than where the definition declares what a term 'means'. Thus, it has been said that the word 'includes' is usually a term of enlargement, and not of limitation. It, therefore, conveys the conclusion that there are other items includible, though not specifically enumerated.' (Sutherland, Statutory Construction, 4th ed., Vol. 24, p. 82, Sec. 47.08) Even assuming that the VAT is imposable only on services performed by persons enumerated in Section 108(A), pawnshops would still be subject to VAT pursuant to the last portion of the said Section 108(A) which included 'similar services regardless of whether or not the performance thereof calls for the exercise or use of physical or mental faculties', in those which are imposed a 10% VAT. The services of pawnshops would fall under 'similar services' inasmuch as their services are similar to those of a lending investor. Both lending investor and pawnshops make a practice of lending money at interest. Moreover, the transactions of pawnshops are not among those enumerated in Section 109 of the Tax Code as exempt from VAT under Section 108(A). If it was indeed the intention of the legislature, as respondent claims, to exclude pawnshops from the imposition of VAT, why was it not included in the enumerated exemptions? Contrary to the claim of the respondent, the legislative intent is to subject pawnshop to VAT, otherwise, it could have included pawnshops among those exempted from VAT. The respondent stresses that it is claiming exclusion and not exemption from the coverage of the value-added tax law. However, it is important to note, that there are no exclusions from VAT, as it is imposed on all kinds of services. There are exemption, though, under Section 109 of the NIRC. Pawnshop transactions, as earlier stated, are not among those exempted. Tax exemptions must be expressly granted in a statute. Here, there is nothing in the statute which explicitly exempts pawnshops from payment of the VAT. WHEREFORE, premises considered, the appealed decision of the Court of Tax Appeals in CTA Case No. 6319 is hereby REVERSED and SET ASIDE, and a new one is entered ORDERING the responded Exquisite Pawnshop & Jewelry, Inc., to pay the amount of P1,607,114.28 as deficiency value-added tax for the year 1997. SO ORDERED." The final construction of statutes rests with the courts. Thus, in view of the above decision of the Court of Appeals, the present official stand of the BIR is that pawnshops are subject to the 10% value-added tax (VAT). The same, however is under review in light of the passage of R.A. No. 9238. Issue No. 2 : Whether BIR can revoke its previous rulings. A: Under the law, the Commissioner has the power to revoke, modify and reverse rulings, opinions or circulars issued by the Bureau of Internal Revenue. However, this is resorted to after a critical and deeper analysis and only upon a clear showing that the law and the facts warrant a revocatory action. But this rule-making power should not be carried out with rigidity and inflexibility. In fact, in most cases, it is not the BIR but the taxpayers themselves who invoke the reversal of previous rulings on the basis of, for instance, new or contemporaneous laws supporting a contrary position, or upon showing that this Office may have committed palpable error of judgment. And rightly so, for administrative rule-making power likewise demands that due process, justice and equity should not be ignored or disregarded just for the sake of maintaining a previous position on a given subject. Indeed, there are doctrines deeply rooted in the past, that have stood the test of time and circumstance. Equally, there are previous positions which must be made adaptable to present circumstance, and so must be changed, in order to prevent injustice. If it is this Office itself which reversed its previous position on its own accord, such revocation is more often rooted on the doctrine that the government is never estopped from collecting a tax that is legally due it. However, this is qualified by Section 246 of the National Internal Revenue Code, in the sense that under this section, rulings and circulars, rules and regulations, promulgated by the Commissioner of Internal Revenue would have no retroactive application if to so apply them would be prejudicial to taxpayers, except in the three instances enumerated therein. This provision of the NIRC on revocation of BIR rulings is quoted hereunder: "SEC. 245. Non-retroactivity of rulings . Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith." Accordingly, the revocation, reversal or modification of rulings cannot be made to apply retroactively to the prejudice of the taxpayer. Unless the taxpayer misstates or omits material facts in documents required by the Bureau of Internal Revenue, or misrepresents the facts upon which a ruling is based or acted in bad faith, he will not be made liable to tax as a result of such revocation or modification. Consequently, should a taxpayer rely on a ruling issued to him/it for purposes of entering into a transaction, contract or agreement, the tax consequences of a subsequent revocation or reversal of the ruling relied upon cannot be made to apply to the said transaction, contract or agreement if prejudicial to the affected taxpayer. This Bureau does not resort to arbitrary reversal of rulings. In the event that a reversal of ruling cannot be avoided, such reversal is not done for light or flimsy reasons but only in the interest of justice and fair play and after a careful and judicious study of the case and generally with no retroactive effect (BIR Ruling No. DA-353-2000 dated September 28, 2000). Issue No. 3 : Whether or not RMO No. 15-91 is invalid. A: The Supreme Court in the case of Commissioner of Internal Revenue vs. Michel J. Lhuiller Pawnshop, Inc. (G.R. No. 150947) declared RMO No. 15-91 null and void since RMO No. 15-91 is deemed automatically repealed by the repeal of Section 116 of the NIRC of 1977 on which RMO No. 15-91 depended; and RMO No. 15-91 was not published in the Official Gazzette or in a newspaper of general circulation. Thus, the Supreme Court said: "It may not be amiss to state that, as pointed out by the respondent, pawnshops was sought to be included as among those subject to 5% percentage tax by House Bill No. 11197 in 1994. Section 13 thereof reads: Section 13. Section 116 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows: 'Sec. 116. Percentage tax on dealers in securities; lending investors; OWNERS OF PAWNSHOPS; FOREIGN CURRENCY DEALERS AND/OR MONEY CHANGERS. Dealers in securities shall pay a tax equivalent to Six (6%) per centum of their gross income. Lending investors, OWNERS OF PAWNSHOPS AND FOREIGN CURRENCY DEALERS AND/OR MONEY CHANGERS shall pay a tax equivalent to Five (5%) percent of their gross income.' . . . At any rate, such proposed amendment was not adopted. Instead, the approved bill which became R.A. No. 7716 repealed Section 116 of NIRC of 1977, as amended, which was the basis of RMO No. 15-91 and RMC No. 43-91; thus: SEC. 20. Repealing Clauses . The provisions of any special law relative to the rate of franchise taxes are hereby expressly, repealed. Sections 113, 114 and 116 of the National Internal Revenue Code are hereby repealed. cSTHAC Section 21 of the same law provides that the law shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two (2) national newspapers of general circulation whichever comes earlier. R.A. No. 7716 was published in the Official Gazette on 1 August 1994; in the Journal and Malaya newspapers, on 12 May 1994; and in the Manila Bulletin, on 5 June 1994. Thus, R.A. 7716 is deemed effective on 27 May 1994. Since Section 116 of the NIRC of 1977, which breathed life on the questioned administrative issuances, had already been repealed, RMO 15-91 and RMC 43-91, which depended upon it, are deemed automatically repealed. Hence, even granting that pawnshops are included within the term lending investors , the assessment from 27 May 1994 onward would have no leg to stand on. Adding to the invalidity of the RMC No. 43-91 and RMO No. 15-91 is the absence of publication. While the rule-making authority of the CIR is not doubted, like any other government agency, the CIR may not disregard legal requirements or applicable principles in the exercise of quasi-legislative powers. xxx xxx xxx RMO No. 15-91 and RMC 43-91 cannot be viewed simply as implementing rules or corrective measures revoking in the process the previous rulings of past Commissioners. Specifically, they would have been amendatory provisions applicable to pawnshops. Without these disputed CIR issuances, pawnshops would not be liable to pay the 5% percentage tax, considering that they were not specifically included in Section 116 of the NIRC of 1977, as amended. In so doing, the CIR did not simply interpret the law. The due observance of the requirements of notice, hearing, and publication should not have been ignored. There is no need for us to discuss the ruling in CA-G.R. SP No. 59282 entitled Commissioner of Internal Revenue v. Agencia Exquisite of Bohol, Inc. , which upheld the validity of RMO No. 15-91 and RMC No. 43-91. Suffice it to say that the judgment in that case cannot be binding upon the Supreme Court because it is only a decision of the Court of Appeals. The Supreme Court, by tradition and in our system of judicial administration, has the last word on what the law is; it is the final arbiter of any justifiable controversy. There is only one Supreme Court from whose decisions all other courts should take their bearings. In view of the foregoing, RMO No. 15-91 and RMC No. 43-91 are hereby declared null and void. Consequently, Lhuillier is not liable to pay the 5% lending investor's tax." Under the " doctrine of stare decisis ," ordained in Article 8 of the Civil Code, decisions of the Supreme Court applying or interpreting the law shall form part of the legal system of the Philippines. The rule follows the settled legal maxim " legis interpretado legis vim obtinet " that the interpretation placed upon the written law by a competent court has the force of law. Accordingly, RMO No. 15-91 is invalid, based on the decision of the Supreme Court in the above case. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group