Divina & Uy Law Offices

June 25, 2010 BIR RULING [DA-(VAT-016) 109-10] Section 105, 122; RA 9238; BIR Ruling No. 023-09; BIR Ruling 019-05 Divina & Uy Law Offices 8th Floor, Pacific Star Building, Sen. Gil Puyat Avenue Corner Makati Avenue, Makati City Attention: Atty. Nilo T. Divina and Neli A. Raule-Lumanog Gentlemen : This refers to your letter dated May 3, 2010 requesting for a confirmatory ruling, as regards your position on the non-imposition of Value-Added Tax (VAT) on the sale of receivables by PCCI Finance Corporation (PCCI) to Equicom Savings Bank, Inc. (ESB) The facts, as represented, are as follows: PCCI, with Tax Identification No. 000-855-814-000, is a local financing company organized under by virtue of Philippine Laws engaged in a wide range of financial services such as financing of receivables, purchasing of notes payable on installment and domestic bills, and discounting of lease contracts. On the other hand, ESB, with Tax Identification Number 000-434-017, is a thrift bank registered with the Bangko Sentral ng Pilipinas and engaged in general financing and investment particularly in the business of savings and mortgage banking. You understand that pursuant to Revenue Regulations No. 16-2005, otherwise known as the "Consolidated Value Added Tax Regulations of 2005", VAT-Exempt transactions include service of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries subject to percentage tax under Sections 121 and 122 of the Tax Code, such as money changers and pawnshops". HEISca Corollarily, under Revenue Regulations No. 9-2004, implementing Republic Act 9238, certain services were excluded from the coverage of VAT and instead re-imposed Gross Receipts Tax (GRT) particularly on banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries. Notably, pursuant to said RA 9238, Sections 121 and 122 of the Tax Code have been revised as to include among those subject to GRT, "net trading gains within the taxable year on foreign currency, debt securities, derivatives and other similar financial instruments." Based on the foregoing, you would like to request for confirmatory ruling on the following: 1. No VAT is due on the sale of Receivable by PCCI to ESB, the same being part and parcel of its traditional activity of sale and/or exchange of services and therefore deemed VAT-exempt under the Consolidated VAT Regulations of 2005. 2. Where the seller and purchaser of Receivables are either a bank or a financial intermediary performing quasi-banking activity, the earnings derived from the sale of receivables constitute net trading gains and should then be subject to GRT and not to VAT, in accordance with RA 9238, as implemented by Revenue Regulations No. 9-2004. 3. The sale of Receivables on discount and on without recourse basis may be deemed as a financing/collection scheme and thus constituting traditional banking/financial service or activity. In reply, please be informed as follows: In BIR Ruling No. 023-09 dated November 26, 2009, citing VAT Ruling No. 016-97 dated February 27, 1997 and BIR Ruling No. 019-05 dated September 21, 2005, this Office has categorically ruled that while sales of goods and services are subject to VAT under Sections 106 and 108 of the Tax Code, sales of accounts receivable to banks and/or financial institutions in the nature of financing alternative are not subject to VAT, to wit: "In VAT Ruling No. 16-97 dated February 27, 1997, this Office held that sale of account receivables to banks and/or financial institutions in the nature of financing arrangement is a mere collection alternative. Since such sale on credit was already subjected to VAT, the financing scheme intended to convert the account receivables of the seller to cash is no longer subject to another round of VAT under Section 100 of the Tax Code of 1997. However, the net trading gains derived from the subsequent trading of the invoice as securities is subject to the 10% VAT compounded by multiplying by 10% the net gain realized from its trading, which gain is the spread between the yield of selling price from trading of such securities and the cost (carrying cost net of unearned discount) of obtaining the same. The net trading gain shall be considered as the gross receipt in the said transaction. Notwithstanding the foregoing, banks and non-bank financial intermediaries, however, are not subject to VAT but to gross receipt tax (GRT) in accordance with Republic Act (RA) No. 9238, as implemented by Rev. Regs. No. 9-2004. Thus, even if they act as brokers or dealers of the invoices that will be traded in the M4SME-RP, their earnings will not be subject to VAT but to GRT." Accordingly, the sale of receivables by PCCI to ESB even on a without recourse basis, may be considered as being in the nature or a financing arrangement and a mere collection alternative, and being part of traditional banking or financial service is not subject to VAT. Moreover, since banks and non-bank financial intermediaries are not subject to VAT but to gross receipt tax (GRT) in accordance with Republic Act (RA) No. 9238, as implemented by Rev. Regs. No. 9-2004, the net trading gain by the Bank is not subject to VAT but to GRT. ADHaTC 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group