Transactions Prior to January 1, 2003 Not Subject to VAT

September 13, 2004 BIR RULING NO. 016-04 000-00 Presiding Judge Fatima Gonzales-Asdala Regional Trial Court, Branch 87 National Capital Judicial Region Quezon City, Metro Manila M a d a m : This refers to your letter dated June 17, 2003 regarding your query in the implementation of Revenue Regulations No. 12-2003 (RR 12-2003 for brevity) requiring the imposition of Value-Added Tax (VAT for brevity) on services offered by banks, non-bank financial intermediaries and finance companies effective January 1, 2003. It is your position that such implementation cannot be given retroactive effect to cover the borrowers who contracted their obligations before January 1, 2003. It cannot also be imposed on interests on the loan (incurred before January 1, 2003) payable from January 1, 2003 onwards until the last amortization is due, as the case may be, because to do so, would be giving the directive the same retroactive effect which is what is not proper and allowed. You posit that RR 12-2003 can only have prospective application, that is, for loans incurred a reasonable period after January 1, 2003. To impose the additional 10% VAT on all interests on loan borrowers effective January 1, 2003 is not only unfair but also violative of the consumer's right to be informed of the burden they will be facing by incurring the loan. A bank which you decline to reveal this time has sent notice to a borrower, dated May 20, 2003, stating that, and you quote: "The VAT is effective January 1, 2003; we will therefore, collect the VAT portion on your interest payments accumulated from January 1, to May 31 due dates; The VAT on row interest payments accumulated from January 1 to May 31 due dates will be amortized for six months and indicated in the new payment schedule which will be sent to you. Loan amortizations from January 1, 2003 and onwards will be adjusted to incorporate the 10% VAT due on your interest payments," As you earlier presented, if the term loan was incurred before January 1, 2003, effective date of 10% VAT imposition, that loan borrower is not among those to be charged with the 10% VAT on interest payments until after the expiration of the term of his loan. SHDAEC You further assert that a prior loan (incurred before January 1, 2003) payable in 10 years, subject to repricing every after 12 months, is not a new loan and therefore must not be subject to the 10% VAT on the interest payments. It is a different story if the loan borrower defaults in his obligation and applies for a restructuring, thence, the restructured loan can be considered a new loan and the applicability of RR 12-2003 on that loan is unquestionable. Such bank notice, therefore, to the loan borrower that 10% VAT on interest payments on his 2002 loans will be imposed chargeable to amortizations falling on the effectivity of RR 12-2003 and onwards is, according to you, arbitrary and legally incorrect, and the bank's impending move to collect further 10% VAT on interest payments for loan amortization due from June 2003 and onwards is illegal and arbitrary. The borrower's obligation incurred prior to January 2003, the amortizations payable from 2002 and traversing the effectivity of RR 12, 2003, in your humble opinion, not one of the transactions that must be covered by the RR 12-2003 10% VAT imposition, hence, any bank and/or financial institution therefore, collecting the 10% VAT for interest payments due on loans or obligations incurred prior to January 1, 2003 is unquestionably undertaking an illegal action arising from a distorted interpretation of the intendment of the directive. Laws are not to be given retroactive effect unless favorable to those who will be affected. Such is unconstitutional. Parenthetically, laws that will onerously increase the burden of any borrower cannot be given retroactive effect. The intendment of the law in espousing the principle of non-retroactivity of the application of laws that will in any way or another be prejudicial is simple equity and justice. The sole issue thus presented before this Office is: Whether or not transactions that occurred prior to January 1, 2003 are subject to the 10% VAT. In reply, please be informed that Section 105 of the 1997 Tax Code specifically provides that: "SEC. 105. Persons Liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716 . xxx xxx xxx" (Emphasis supplied.) Well-settled in our jurisprudence is the presumption that all laws operate prospectively, unless the contrary clearly appears or is clearly, plainly, and unequivocally expressed or necessarily implied. CacHES The above-quoted provision of law is so clear, plain and unequivocal that it leaves no room for other interpretation. The effective implementation of Republic Act No. 7716 (E-VAT Law) began on January 1, 1996. Ergo, all existing contracts from the said date should have been subject to the 10% VAT were it not for the deferment. The imposition of the VAT on these particular taxpayers was deferred several times, the last enactment being R.A. 9010. The pertinent portion is quoted hereunder: "SEC. 1. Section 5 of Republic Act No. 8424, as amended by Republic Act No. 8761, is hereby further amended to read as follows: "Sec. 5. Transitory Provisions Effectivity of the imposition of VAT on Certain Services . The imposition of the value-added tax on the following services shall take effect on January 1, 2003 ; xxx xxx xxx" (Emphasis supplied.) Thus, starting January 1, 2003 transactions entered into by these particular taxpayers, including those prior to the said date, shall now be subject to VAT. Consequently, RR 12-2003 must be given retroactive application to implement the imposition of VAT on such transactions. ICTcDA Please be guided accordingly. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue