BIR Ruling [DA-597-04]

November 24, 2004 BIR RULING [DA-597-04] Robinsons Land Corporation Level 2, Galleria Corporate Center Robinsons Galleria EDSA corner Ortigas Avenue Quezon City Attention: Atty. Betty Salvador Gentlemen : This refers to your letter dated August 24, 2004 requesting for confirmation of your opinion that Eduardo L. Montinola Corporation, the Lessor, can no longer add the 10% value-added tax (VAT) on the rentals stipulated in a Contract of Lease with Robinsons Land Corporation, as the Lessee. It is represented that a Contract of Lease, entered into by and between the Lessor and Lessee on February 26, 1999, contains the following provisions: 4. RENTALS 4.1. Area A Commercial Building "(a) For the first twenty four (24) years, the Lessee shall pay to the Lessor the amount of Twenty Six Pesos and 50/100 (P26.50) per square meter/per month with an escalation of fifteen percent (15%) every two (2) years on the current rental rate. For the remaining twenty six (26) years, the rental rate shall be subject to an escalation of ten percent (10%) per annum on the current rental rate. xxx xxx xxx 4.2. Area B Parking Area "(a) The Lessee shall pay the Lessor the amount of Twenty Two Pesos and 50/100 (P22.50) per square meter/per month with an escalation of fifteen percent (15%) every two (2) years on the current rental rate. xxx xxx xxx 9. GOVERNMENT TAXES, FEES AND CHARGES " The Lessor shall pay for the taxes, government fees and charges if any, due on the land and on the lease contract . In the event the Lessor fails to pay the foregoing when due, the Lessee may advance the payment and is hereby authorized by the Lessor to make an automatic deduction of any amount advanced from rental due to Lessor. "The Lessee shall pay for the real property tax on the improvements it has constructed on the property during the term of the lease." However, in BIR Ruling No. DA368-04 dated July 1, 2004, this Office ruled that "In view of the foregoing, this Office holds that Eduardo L. Montinola Corporation may include in its billing the 10% value-added tax on the lease of its real property to Robinsons Land Corporation computed in accordance with Section 108 of the Tax Code of 1997." In reply thereto, please be informed that Sections 105 and 108(A) of the Tax Code of 1997 provide as follows: "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 imposed in Sections 106 and 108 of the said Code. STcAIa "xxx xxx xxx "Sec. 108. Value-added Tax on Sale of Services and use or Lease of Properties . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of the gross receipts derived from the sale or exchange of services, including the use or lease of properties . "xxx xxx xxx For this purpose, the term "gross receipts" means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actively or constructively received during the taxable quarter for the services performed or to be performed for, another person, excluding value-added tax. It is to be emphasized that VAT is an indirect tax in which the amount of the tax may be shifted to or passed on to the buyer, transferee or lessee of goods, properties or services. (Sec. 4.99-2, Revenue Regulations No. 7-95, as amended). Thus, VAT is the direct liability of the lessor, once shifted, it is no longer a tax on the part of the lessee but an additional cost which the lessee must pay to obtain the lease of property. However, despite his right to shift, the seller may elect to absorb the tax himself. ( Maceda vs. Macaraig, Jr., etc., et al., G.R. No. 88291, May 31, 1991 )( BIR Ruling No. 037-99 dated March 29, 1999 ) The attached Contract of Lease executed by the above-named parties clearly shows that the Lessor shall be the one to pay the taxes due on the land and on the lease contract, which necessarily includes the 10% VAT. While VAT is the direct liability of the Lessor, being an indirect tax the same can be shifted to the lessee. However, since the Lessor in the instant case has decided to absorb the VAT due on the lease of the property, it can no longer pass on the 10% VAT to the Lessee. WHEREFORE, this Office holds that the Lessor, Eduardo L. Montinola Corporation, can no longer pass on the 10% VAT to the Lessee, Robinsons Land Corporation, relative to the rental income received as stipulated in the Contract of Lease executed on February 26, 1999. Accordingly, this amends BIR Ruling No. DA368-04 dated July 1, 2004. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group