BIR Ruling [DA-665-04]

December 23, 2004 BIR RULING [DA-665-04] R.A. 9238; P.D. 1931; E.O. 93; 121; 122 VAT Ruling No. 039-2003 Home Development Mutual Fund Office of the President and Chief Executive Officer Corporate Headquarters, 8/F Atrium of Makati Makati Avenue, Makati City Attention: Atty . Romero Federico S . Quimbo President and Chief Executive Officer Gentlemen : This refers to your letter dated October 11, 2004 requesting for confirmation of your opinion that the interest and other fees collected and received by the Home Development Mutual Fund , otherwise known as the "Pag-Ibig Fund", (hereinafter referred to as the "Fund") from extending loans in pursuit of its Charter-mandated activities are not subject to the gross receipts tax (GRT). The Fund was established on June 11, 1978 under Presidential Decree (PD) No. 1530 known as the Home Development Mutual Fund. The Fund is a system of voluntary contributions from public and private employees and their respective employers envisioned to help provide massive financing in order to solve the acute housing shortage in the Philippines. The rationale behind the creation of the Fund under PD No. 1530, among others, is to provide the citizens with sufficient human shelters and structures for the enjoyment of the people of a decent standard of living. To achieve this end, the Fund will provide massive financing to help solve the housing problem that impedes national development through establishing a system of voluntary contributions from government and private employees. Subsequently, Presidential Decree (PD) No. 1752, dated December 14, 1980 designated the Fund as a separate institution to administer the pool of savings of both public and private employees, and re-emphasized the public purpose behind the creation of the Fund, to wit: "WHEREAS, the Government, in pursuit of the Constitutional mandate on the promotion of public welfare through ample social services, as well as its humanist commitment to the interests of the working groups, in relation particularly to their need for decent shelter, has established the Home Development Mutual Fund, under Presidential Decree No. 1530, a system of employee-employer contributions for housing purposes; and WHEREAS, there is a need to strengthen the Home Development Mutual Fund and make it more effective both as a savings generation and home- building program for the gainfully- employed members of the Philippine society;" The sole purpose behind the establishment of the Fund is to aid the Government in the attainment of its constitutional mandate to provide a continuing program of urban land reform and housing which will make available cost decent housing to the underprivileged and homeless citizens as well as funds to finance not only its members' loan transactions but also those of the private sector and governmental institutions pursuant to the various governmental housing programs. This completely eliminates any business, commercial or economic motive in any of the activities performed by the Fund in accordance with its Charter, P.D. 1752, as amended. Republic Act (RA) No. 8501, otherwise known as the "Housing and Loan Condonation Act of 1998, recognized the Fund as the major financing institution involved in the National Shelter Program of the Government. The latter program involves various continuing programs of the Government to make available at affordable cost decent housing to the underprivileged citizens of the Philippines. In reply, please be informed that HDMF's tax exemption under P.D. No. 1530, as amended by E.O. No. 538 and P.D. No. 1752, was repealed by P.D. No. 1931, effective June 11, 1984, to wit: "SEC. 1. The provisions of special or general law to the contrary notwithstanding, all exemptions from the payment of duties, taxes, fees, imposts and other charges heretofore granted in favor of government-owned or controlled corporations including their subsidiaries, are hereby withdrawn." While HDMF's tax exemption, withdrawn by P.D. No. 1931, was however, restored by LOI No. 1525 promulgated February 6, 1986, said tax exemption was again withdrawn by E.O. No. 93 promulgated December 17, 1986. Thus, HDMF, as a government finance company under RA 8501, became liable to the payment of duties, taxes, fees, imposts and other charges. Section 105 of the Tax Code of 1997 provides, to wit: xxx xxx xxx "The phrase ' in the course of trade or business ' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity." Pursuant to Section 2.7 of Revenue Regulations (RR) No. 12-2003, implementing R.A. No. 9010 which provides, to wit: "2.7 Financing Companies shall refer to corporations except banks, investments 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." In VAT Ruling No. 039-2003 dated September 24, 2003, this Office has already ruled as follows: "Consequently, HDMF, was not a tax-exempt government entity at the time the VAT law was promulgated under E.O. No. 273, effective January 1, 1988. The only reason why HDMF was not subjected to the VAT effective January 1, 1988 was, because HDMF qualified as a "Finance Company," hence, VAT-exempt pursuant to Section 103(j), but instead, subject to the percentage tax pursuant to Section 120, both under the old NIRC of 1977. xxx xxx xxx It follows, the HDMF's money lending activities, being a 'commercial or an economic activity,' is embraced under the phrase "in the course of trade or business." In fine, it is subject to VAT. HDMF's money lending activities is rendering of service to its members/borrowers." Hence, HDMF is subject to VAT starting January 1, 2003 pursuant to Republic Act 9010. However, when Republic Act 9238 dated July 28, 2003 lapsed into law, HDMF as a financial institution, was excluded from the coverage of the VAT and again subject to the gross receipts tax imposed under Sections 121 and 122 of the Tax Code of 1997. cEaACD Accordingly, this effectively modifies VAT Ruling No. 039-2003 dated September 24, 2003 inasmuch as HDMF was previously subjected to VAT in the year 2003. Therefore, starting January 1, 2004, HDMF is subject to the gross receipts tax as a financial institution. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group