BIR Ruling [DA-571-98]

December 21, 1998 BIR RULING [DA-571-98] Ayala Land, Inc. Makati Stock Exchange Bldg. Ayala Avenue, Makati City Attention: Atty . Ma . Angeli O . Lerma Gentlemen : This refers to your letter dated April 24, 1998 requesting for opinion on the exemption from value-added tax of business enterprises registered under Republic Act No. 6810, otherwise known as the "Magna Carta for Countryside and Barangay Business Enterprises (CBBEs)" or Kalakalan 20. LLpr It is represented that Ayala Land, Inc ., ( ALI ) is a corporation organized and existing under Philippine laws and leases commercial spaces to its customers or tenants in its commercial centers; that one of your tenants, Erlinda's Manufacturing Corporation ( EMC ), is a corporation organized and existing under Philippine laws; that EMC is registered under R. A. No. 6810, or Kalakalan 20; that the exemption of EMC extends only to taxes for which it is directly liable; that the value-added tax (VAT) on rental of commercial space, being an indirect tax, can be passed on by ALI to EMC and once the burden of paying the same is shifted to EMC, EMC cannot claim exemption from it; and that once shifted, the VAT forms part of the cost of services that EMC purchases. In reply, please be informed that Section 3 of R. A. No. 6810 provides as follows: "SEC. 3. . . . All CBBEs shall be exempt from all taxes, national or local, license and building permit fees and other business taxes, except real property and capital gains taxes, import duties and other taxes on imported articles. In addition, any and all income, receipts and proceeds derived from the business operations of the CBBE shall be excluded from the computation of gross income for purposes of computing the individual income tax of the owners/members thereof. It shall be exempted from any and all government rules and regulations in respect of assets, income, and other activities indispensably and directly utilized in, proceeding from or connected with the business of the enterprise. . . . " In view thereof, this Office is of the opinion that EMC, being a registered CBBE under Kalakalan 20, is only exempt from taxes for which it is directly liable. Since the VAT is an indirect tax, ALI may shift the burden of paying the VAT to EMC, not as a tax but as part of the cost of rental charges of the commercial space it leases from ALI. Once shifted, EMC cannot claim exemption from payment of the VAT since it is exempt from the VAT only on its sale of goods and services, but NOT on its purchases of goods and services (VAT Ruling No. 032-91, dated 29 May 1991, BIR Ruling No. 183-90, dated 18 September 1990). cdt Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group