BIR Ruling [DA-646-06]

October 31, 2006 BIR RULING [DA-646-06] BIR Ruling No. 008-2006 Ilo Land, Inc . #7 Mountain Drive, LISP II Brgy. La Mesa Calamba, Laguna Attention: Mr. Eaton Brian Ong President Gentlemen : This refers to your letter dated September 13, 2006 requesting for legal opinion on whether or not you can add the input tax to the cost of the building instead of claiming the same as VAT refundable. As represented, Ilo Land, Inc. is a PEZA-registered Ecozone Facilities Enterprise with PEZA Registration Certificate No. 97-006-F dated August 15, 1997, engaged in the leasing of real properties. It is registered with the BIR as a VAT registered entity. The company has purchased materials for the construction of a building classified as capital asset. Said building is not intended for sale but as an investment. This capital asset is likewise not related to VATable products, hence, you decided to capitalize the VAT amounting to P2,975,289.87. In reply, please be informed that pursuant to Section 112, Tax Code of 1997, a VAT-registered person may, to the extent such input taxes have not been applied against output taxes, apply for the issuance of a tax credit certificate or refund of input taxes which are (1) directly attributable to zero-rated or effectively zero-rated sales, the acquisition of capital goods, purchase of land, or cancellation of VAT registration due to retirement, change or cessation of status as a VAT-registered person and (2) paid on imported or locally purchased capital goods. HEASaC In case a person is engaged in taxable as well as exempt sales of goods, properties and services, only the input taxes on purchases directly attributable to taxable transactions, i.e., zero-rated and acquisition of capital goods, are eligible for refund or issuance of tax credit certificate. The input taxes directly attributable or allocable to exempt transactions become part of the cost of capital goods purchased or of operating expenses (cited in BIR Ruling No. DA234-2004 dated May 7, 2004) In other words, only the input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but should be treated as part of cost or expense (Sec. 4.110-4, Rev. Regs. No. 16-2005). Nowhere is it provided that input taxes on purchases directly attributable to taxable transactions, cannot be treated as part of the cost of capital goods purchased. What the law provides is that said input taxes are eligible for refund or issuance of tax credit certificate. In view of the foregoing, this Office poses no objection to the input VAT being added to cost of the building, provided , that input taxes deducted shall not be reported/reflected in the VAT return and provided , further, that such input taxes shall not be claimed as input tax credit in any future VAT returns. Moreover, the input tax treated as part of the cost of capital goods purchased shall be removed from the company's inventory of input taxes and should be clearly reflected in the company's financial record. Furthermore, the company is required to attach in its quarterly VAT returns a separate sheet containing/reflecting the amount of input VAT applied as deduction against its gross income. In case, however, a claim for refund or credit has already been resorted to, simultaneous with or subsequent to the deduction, and such claim for refund or credit is granted, the amount so deducted should be considered and declared as income subject to the ordinary income tax prescribed under Section 27 of the Tax Code of 1997, as amended. (Section 34(C)(1), 1997 Tax Code, as amended; BIR Ruling No. DA-319-05 dated July 15, 2005; and BIR Ruling No. 008-2006 dated September 8, 2006). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service