Sungate Pawnshop, Inc.

December 5, 2008 BIR RULING [DA-(VAT-049) 500-08] R.A. 9238; RR 10-2004; BIR Ruling No. DA-582-07 Sungate Pawnshop, Inc. 14 Suter Building, Mercado Extension Zamboanga City Attention: Felicisima A. Balagot Accountant Gentlemen : This refers to your letter dated August 14, 2008 requesting for confirmation of your opinion that in view of the pronouncement of the Supreme Court in FIRST PLANTERS PAWNSHOP, INC. vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 174134, July 30, 2008, wherein the Highest Magistrates ruled that pawnshops are not liable for VAT starting 1996 to 2002, your VAT payments for the years 1998-2002 which are paid under protest can now be refunded to you. It is represented that SUNGATE PAWNSHOP, INC. ("SUNGATE", for brevity) after it was assessed and paid its deficiency value-added tax (VAT) assessment for taxable year 1997 has paid under protest value-added tax for taxable years 1998 to 2002 to avoid surcharges, interests and compromise penalties; that as these payments under protest were made, and because you are of the opinion that pawnshops are not covered by VAT, written claims for refund/tax credit were filed within the two-year reglementary period provided for by law with the Revenue Region No. 15, Zamboanga City for taxable years 1998 to 2002; that for the reasons that several conflicting decisions from the Court of Tax Appeals and Court of Appeals were promulgated wherein some ruled that pawnshops are not subject to VAT and some ruled to the contrary, the BIR-Zamboanga City had just taken note of your claims and deferred the processing thereof until the VAT issue on pawnshops are finally decided by the Supreme Court; that, however, with the promulgation by the Supreme Court in the case of First Planters Pawnshop, Inc. vs. Commissioner of Internal Revenue, wherein the Supreme Court had already settled that pawnshops are not liable for VAT for taxable years 1996 to 2002, you are of the opinion that your VAT payments for taxable years 1998-2002 which are paid under protest should be rightfully refunded to SUNGATE. In reply, please be informed that initially, in Revenue Memorandum Order No. 15-91 dated March 11, 1991, a pawnshop business was considered as "akin to lending investor's business activity" and subject to 5% percentage tax beginning January 1, 1991, under Section 116 of the Tax Code of 1977, as amended by E.O. No. 273. With the passage of Republic Act (R.A.) No. 7716 or the EVAT Law in 1994, the BIR abandoned its earlier position and maintained that pawnshops are subject to 10% VAT, as implemented by Revenue Regulations No. 7-95. This was complemented by Revenue Memorandum Circular No. 45-01 dated October 12, 2001, which provided that pawnshops are liable to the 10% VAT based on gross receipts beginning January 1, 1996, while pawnshops whose gross annual receipts do not exceed P550,000.00 are liable for percentage tax, pursuant to Section 109 (z) of the Tax Code of 1997. Court of Tax Appeals (CTA) decisions affirmed the BIR's position that pawnshops are subject to VAT. In H. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6915, April 11, 2004, the CTA ruled that the petitioner-pawnshop therein was subject to 10% VAT under Section 108 of the Tax Code of 1997. Antam Pawnshop Corporation vs. Commissioner of Internal Revenue, CTA Case No. 7069, June 17, 2005 reiterates said ruling. It was the CTA's view that the services rendered by pawnshops fall under the general definition of "sale or exchange of services" under Section 108 (A) of the Tax Code of 1997. TaEIAS Meanwhile, on July 15, 2003, the Supreme Court rendered Commissioner of Internal Revenue vs. Michael J. Lhuillier Pawnshop, Inc., G.R. No. 150947, July 15, 2003, in which it was categorically ruled that while pawnshops are engaged in the business of lending money, they are not considered "lending investors" for the purpose of imposing percentage taxes. The Highest Magistrate gave the following reasons: first, under the 1997 Tax Code, pawnshops and lending investors were subjected to different tax treatments; second, Congress never intended pawnshops to be treated in the same way as lending investors; third, Section 116 of the NIRC of 1977 subjects to percentage tax dealers in securities and lending investors only; and lastly, the BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC 43-91 that pawnshops were not subject to the 5% percentage tax on lending investors imposed by Section 116 of the NIRC of 1977, as amended by Executive Order No. 273. In view of said ruling, the BIR issued Revenue Memorandum Circular No. 36-2004 dated June 16, 2004, canceling the previous lending investor's tax assessment on pawnshops. Said circular stated, inter alia : "In view of the said Supreme Court decision, all assessments on pawnshops for percentage taxes as lending investors are hereby cancelled. This Circular is being issued for the sole purpose of resolving the tax liability of pawnshops to the 5% lending investors tax provided under the then Section 116 of the NIRCof1977, as amended, and shall not cover issues relating to their other tax liabilities. All internal revenue officials are enjoined from issuing assessments on pawnshops for percentage taxes on lending investors, under the then Section 116 of the NIRCof1977, as amended. For purposes of the gross receipts provided for under Republic Act No. 9294, the pawnshops are now subject thereof. This shall, however, be covered by another issuance." Revenue Memorandum Circular No. 37-2004 was issued on the same date whereby pawnshop businesses were allowed to settle their VAT liabilities for the taxable years 1996-2002 pursuant to a memorandum of agreement entered into by the Commissioner of Internal Revenue and the Chambers of Pawnbrokers of the Philippines, Inc. The Circular likewise instructed all revenue officers to ensure that "all VAT due from pawnshops beginning January 1, 2003, including increments thereto, if any, are assessed and collected from pawnshops under its jurisdiction." In the interim, however, Congress passed Republic Act (R.A.) No. 9238 on February 5, 2004 entitled, "An Act Amending Certain Sections of the National Internal Revenue Code of 1997, as amended, by Excluding Several Services from the Coverage of the Value-Added Tax and Re-imposing the Gross Receipts Tax on Banks and Non-bank Financial Intermediaries Performing Quasi-banking Functions and Other Non-bank Financial Intermediaries beginning January 1, 2004." This was implemented by Revenue Regulations No. 9-2004 dated June 21, 2004. cASEDC Subsequently, the BIR issued Revenue Regulations No. 10-2004 dated October 18, 2004, classifying pawnshops as Other Non-bank Financial Intermediaries. The BIR then issued Revenue Memorandum Circular No. 73-2004 on November 25, 2004, prescribing the guidelines and policies on the assessment and collection of 10% VAT for gross annual sales/receipts exceeding P550,000.00 or 3% percentage for gross annual sales/receipts not exceeding P550,000.00 of pawnshops prior to January 1, 2005. In fine, prior to the EVAT Law, pawnshops were treated as lending investors subject to lending investor's tax. Subsequently, with the Supreme Court's ruling in the case Lhuillier, pawnshops were then treated as VATable enterprises under the general classification of "sale or exchange of services" under Section 108 (A) of the Tax Code of 1997, as amended. R.A. No. 9238 finally classified pawnshops as Other Non-bank Financial Intermediaries. It is noteworthy to mention that under the National Internal Revenue Code of 1977, pawnshops should have been levied the 5% percentage tax on gross receipts imposed on banks and non-bank financial intermediaries under Section 119 (now Section 121 of the Tax Code of 1997). With the imposition of the VAT under R.A. No. 7716 or the EVAT Law, pawnshops should have been subjected to the 10% VAT imposed on banks and non-bank financial intermediaries and financial institutions under Section 102 of the Tax Code of 1977 (now Section 108 of the Tax Code of 1997). This was restated by R.A. No. 8241, which amended R.A. No. 7716, although the levy, collection and assessment of the 10% VAT on services rendered by banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions, were made effective January 1, 1998. TIEHDC R.A. No. 8424 or the Tax Reform Act of 1997 likewise imposed a 10% VAT under Section 108 but the levy, collection and assessment thereof were again deferred until December 31, 1999. The levy, collection and assessment of the 10% VAT was further deferred by R.A. No. 8761 until December 31, 2000, and by R.A. No. 9010, until December 31, 2002. With no further deferments given by law, the levy, collection and assessment of the VAT on banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions were finally made effective beginning January 1, 2003. Finally, with the enactment of R.A. No. 9238, the services of Other Non-Bank Financial Intermediaries (which include pawnshops pursuant to Revenue Regulations No. 10-2004) were specifically exempted from VAT, and the 0% to 5% percentage tax on gross receipts was re-imposed under Section 122 of the Tax Code of 1997. In BIR Ruling No. DA-582-07 dated November 9, 2007, this Office opined that: "WHEREFORE, in view of the foregoing, this Office holds that for tax purposes, Star Group Companies shall be treated as an Other Non-Bank Financial Intermediary performing activities similar to a financing company subject to GRT imposed under Section 122 of the Tax Code of 1997, as amended." HaAISC Furthermore, in BIR Ruling No. DA-207-08 dated March 28, 2008, it was held that for tax purposes, Meridian shall be treated as an Other Non-Bank Financial Intermediary performing activities similar to a financing company subject to GRT imposed under Section 122 of the Tax Code of 1997, as amended. Likewise, in BIR Ruling DA-208-08 dated March 28, 2008, this Office reiterated that for tax purposes, APA shall be treated as an Other Non-Bank Financial Intermediary performing activities similar to a financing company subject to GRT imposed under Section 122 of the Tax Code of 1997, as amended. Accordingly, SUNGATE being classified as Other Non-Bank Financial Intermediary pursuant to Revenue Regulations No. 10-2004, this Office is of the opinion that it is subject to GRT imposed under Section 122 of the Tax Code of 1997, as amended, beginning January 1, 2004. In the most recent case of FIRST PLANTERS PAWNSHOP, INC. vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 174134, dated July 30, 2008, which is squarely at point in the present case, the Supreme Court in resolving the issue as to whether pawnshops are subject to VAT, held in this wise: "Coming now to the issue at hand Since petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the tax years 1996 to 2002; however, with the levy, assessment and collection of VAT from non-bank financial intermediaries being specifically deferred by law, then petitioner is not liable for VAT during these tax years. But with the full implementation of the VAT system on non-bank financial intermediaries starting January 1, 2003, petitioner is liable for 10% VAT for said tax year. And beginning 2004 up to present, by virtue of R.A.No.9238, petitioner is no longer liable for VAT but it is subject to percentage tax on gross receipts from 0% to 5%, as the case may be." Based on the foregoing pronouncement of the Supreme Court, the VAT payments "under protest" by SUNGATE for the period 1998 to 2002 constitute erroneously paid value-added tax (VAT) which may be recovered pursuant to the time-honored principle of solutio indebiti provided under Section 2154 of the Civil Code. EScIAa Under the legal principle of quasi-contract or solutio indebiti, SUNGATE's claim for refund/tax credit certificate should be granted. The Government comes within the scope of this principle. As stated by the Supreme Court: ". . . Enshrined in the basic legal principle is the time-honored doctrine that no person shall unjustly enrich himself at the expense of another. It goes without saying that the Government is not exempted from the application of this doctrine." (Commissioner of Internal Revenue vs. Fireman's Fund Insurance Co., et al., L-30644, March 9, 1987, citing Ramie Textiles, Inc. vs. Mathay, L-32364, April 30, 1979). Accordingly, this Office hereby confirms your opinion and holds that SUNGATE's claims for refund for the years 1998 to 2002 representing erroneously VAT payments, may now be granted. This ruling serves as the authority to the concerned Revenue District Office to process the Tax Credit Certificate in favor of SUNGATE subject to the substantiation requirements as provided for by law. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service