J.P. Tolentino & Co.

June 11, 2010 BIR RULING [DA-(C-021) 094-10] Sec. 108 (A); DA597-04 J.P. Tolentino & Co. No. 16 Pelota Street Francis Village, Cainta Rizal Attention: Mr. Joaquin P. Tolentino Gentlemen : This refers to your letter dated January 22, 2010 requesting for reconsideration of BIR Ruling No. DA597-04 dated November 24, 2004 , where this Office ruled that ". . ., the term 'gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service, 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. HACaSc 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." In your aforestated letter, you posit that the Contract of Lease executed on February 26, 1999 between Eduardo L. Montinola (ELM), as the Lessor, and Robinsons Land Corporation (RLC), as the Lessee, did not mention about the value-added tax (VAT); that the lease rate per square meter which was agreed between the parties is the gross receipts of the lessor as defined under Section 108 of the Tax Code, excluding the VAT; that ELM, while directly liable to pay the VAT, is only acting as a collection agent of the BIR in collecting the VAT from RLC because the VAT is an indirect pass-on tax collectible from RLC by ELM for the account of the BIR; that ELM did not elect to absorb the VAT; that the above-cited ruling will prejudice the BIR for being short change, to illustrate: Agreed rental rate is P10,000.00 Exclusive of VAT P10,000.00 Inclusive of VAT at 10% (1/11 of P10,000) 909.09 Difference P90.91 ========= that the term "gross receipts" excludes the VAT; that the rental rate agreed upon between ELM and RLC did not include the VAT; and that VAT is an indirect tax, it is shifted to RLC by ELM, otherwise, it defeats the definition of "gross receipts". In reply thereto, please be informed that after careful review of the above-cited ruling vis-a-vis the regulations governing the VAT on lease of properties, this Office takes cognizance of the fact that Article 1306 of the Civil Code of the Philippines, provides that "Art. 1306. The Contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy." ITESAc Prescinding from the above-cited provisions, it is undisputed that the stipulation in the Contract of Lease that the Lessor shall be the one to pay the taxes due on the land and on the lease contract is neither contrary to law, morals, good customs, public order or public policy. Accordingly, this Office recognizes the validity of the agreement between the Lessor and the Lessee whereby the former assumed the payment of all taxes, which necessarily includes the VAT, as having the force of law between the parties and should be complied with in good faith. Moreover, this Office does not completely agree with your argument that while ELM is directly liable to pay the VAT, it is only acting as a collection agent of the BIR, and will thereby prejudice the BIR in case the VAT is not shifted to RLC. The very nature of VAT will negate this argument. VAT is an indirect tax which may be passed on or shifted to the buyer of goods or services or lease of properties; thus, the person ultimately liable to pay the VAT is the buyer of the goods or services, although the seller is the one primarily liable to pay it. To reiterate, the VAT as an indirect tax may be passed on or shifted to the buyer of goods or services. Thus, at the discretion of the seller, it may free itself of that burden. (BIR Ruling No. 006-07) SUCH BEING THE CASE, this Office holds that your request for reconsideration of BIR Ruling No. DA597-04 dated November 24, 2004 CANNOT be granted for lack of legal basis. Very truly yours, (SGD.) JOEL L. TAN-TORRES Commissioner of Internal Revenue