Sugar Regulatory Administration

April 22, 2009 BIR RULING [DA-(VAT-036) 207-09] Section 108 (A); VAT Ruling No. 038-2000 Sugar Regulatory Administration North Avenue, Diliman, Quezon City Attention: Mr. Rafael Coscolluela Administrator Gentlemen : This refers to your letters dated August 22, 2007 and November 5, 2007 requesting for clarification on the conflicting issue arising from the value-added tax imposition of 12% as an addition to the rental or lease charged by the Sugar Regulatory Administration ("SRA"), as lessor, to the National Food Authority ("NFA"), as lessee. It is represented that a value-added tax at the rate of 12% as an addition to the rental or lease charged by the SRA to the NFA which started on October, 2006, up to the present when SRA has become a VAT registered entity; that the lessee has continuously based the computation of withholding the VAT on the amount stipulated in the Memorandum of Agreement ("MOA") which is exclusive of 12% VAT (additional) on the presumption that the MOA is silent as to the provisions of "inclusivity and/or exclusivity" of the VAT in the monthly rental rate as agreed upon; that it is the position of the SRA that such rate is exclusive of VAT due to the fact that SRA was not a VAT-registered government entity during the time of perfection and execution of the MOA; and that SRA further opines that it would be very illogical, unreasonable and inappropriate to charge the lessee with VAT in the absence of the VAT registration on the part of the lessor or for being a non-VAT registered entity. In reply thereto, please be informed that rental payments fall within the meaning, of gross receipts subject to the 12% value-added tax imposed under Section 108 (A) of the Tax Code of 1997, as amended by Republic Act No. 9337, as implemented by RMC 7-06 dated January 31, 2006. HAISEa 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 payment actually or constructively received during the taxable quarter for the services performed or to be performed for another persons, excluding the value-added tax (Sec. 108 (A) (8), Tax Code of 1997). Hence, all items falling under and/or to be billed as part of the contract amount such as rental payments are subject to VAT and should be properly recognized as such as part of the cost. As provided for in Section 105 of the Tax Code of 1997, as amended, the seller of goods and services, or lessor of property is the person primarily liable for the payment of VAT. Thus, in the absence of any agreement as to the assumption of VAT, the law requires that the same shall be paid by the person directly liable to pay such tax. Moreover, since VAT is an indirect tax, it may be shifted or passed on to the buyer of the goods or services or lessee of the property. Consequently, in the instant case, the lessor SRA may pass on the VAT to its lessee, the NFA. Once shifted, the VAT forms part of the cost of goods or services or the lease. ECaScD It is also noted that SRA has no intention to assume the VAT on such lease after it registered as a VAT taxpayer. While it was initially registered as a non-VAT taxpayer, and for that reason it was not charging the VAT on its lease of property to NFA, it does not mean that it cannot pass on to the latter the VAT due on such lease. As provided for in paragraph 2 of Section 105 of the same Tax Code, the rule on the applicability of VAT to existing contract of sale or lease of goods, properties is reckoned at the time of the effectivity of the EVAT Law (R.A. 7716). Applying the same in the instant case, when the lessor SRA became subject to VAT by reason of its registration, the provisions of the VAT law are deemed carried or incorporated in the contract of lease originally entered into between SRA and NFA. Consequently, the VAT on the lease will effectively increase the agreed lease price by an amount of the VAT. The shifting of the amount of VAT to NFA is an option granted by law to the lessor, SRA. This ruling is issued on the basis of the facts represented. If upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. cHSTEA Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner