BIR Ruling No. 047-13

January 24, 2013 BIR RULING NO. 047-13 Secs. 105 and 108 (A) (7) of the Tax Code of 1997, as amended Gallardo Songco and Associates Unit 300 Valero Plaza 124 Valero St., Salcedo Village Makati City 1227 Attention: Atty. Raymund S. Gallardo Managing Partner Gentlemen : This refers to your letter dated July 18, 2012 requesting in behalf of your client, ABS-CBN FILM PRODUCTIONS, INC. for an opinion on whether producers/lessors/owners of cinematographic films can pass-on the VAT component to cinema/theater owners on the sale or lease of cinematographic films. It is represented that ABS-CBN FILM PRODUCTIONS, INC., a VAT-registered taxpayer, is engaged in the business of distribution, sale and/or lease of cinematographic films; that under an existing agreement with some theater owners, ABS-CBN FILM PRODUCTIONS, INC. provides/leases to theater owners cinematographic films while the latter provides the venue for the exhibition; that the proceeds from the price of admission are shared on the basis of a fixed percentage previously agreed upon by the parties; that after a particular film is exhibited, ABS-CBN FILM PRODUCTIONS, INC., a Value-Added Tax (VAT) registered taxpayer, issues a VAT sales invoice to theater owners who are also VAT-registered taxpayers; and that a component clearly identified in the sales invoice is the VAT passed-on to the theater owners for the lease of cinematographic films. Based on the foregoing, you now request for the confirmation of your opinion that ABS-CBN Films may properly pass-on to theater/cinema operators the VAT on the lease of cinematographic films as many theater owners refuse to shoulder the aforesaid VAT component on the ground that they are supposedly exempt from the VAT. As basis, these theater owners are citing the recent case of Commissioner of Internal Revenue vs. SM Prime Holdings, Inc. 1 wherein the Supreme Court stated that cinema/theater operators or proprietors who are already subject to amusement tax are exempt from the coverage of the VAT on their gross receipts derived from admission tickets. TSacAE In reply, please be informed that the purchase or lease of cinematographic films is subject to VAT pursuant to Section 108 of the Tax Code of 1997, as amended, which states: SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) (now 12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: . . . The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by . . . lessors or distributors of cinematographic films . . . The phrase 'sale or exchange of service' shall likewise include: xxx xxx xxx (7) The lease of motion picture films, films, tapes and discs ;'' (emphasis supplied) Accordingly, cinematographic film owners/producers and lessors are subject to the twelve percent (12%) VAT on their share in the gross sales or receipts representing their rental income for the use or lease of cinematographic films. Being lessees of services, they can pass on to cinema/theater operators or proprietors the VAT component of the cost of goods and services they sell to the public. Pursuant to Section 105 of the Tax Code of 1997, the 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. Since 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 said lessee must pay to obtain the service. DcITaC The reliance of cinema/theater operators in the case of Commissioner of Internal Revenue vs. SM Prime Holdings to justify their refusal to shoulder the VAT component from their lease of cinematographic film is misplaced. In the first place, what the Court clarified in the said case was the exemption from VAT on the gross receipts derived by cinema/theater operators or proprietors from showing or exhibition of motion pictures, films or movies. In fact, in the same case, the Court ruled that "lessors or distributors of cinematographic films are included in the coverage of VAT". As mentioned above, VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services. While the liability is imposed on one person, the burden may be passed on to another. 2 Therefore, even if cinema/theater operators or proprietors are exempted from its direct liability for payment of the VAT, this does not relieve them as purchasers from their indirect burden of the VAT shifted to it by their VAT-registered suppliers. Thus, the lease transactions entered into by cinema/theater operators or proprietors with lessors or distributors of cinematographic films are not VAT-exempt. Further, the Court explained in Commissioner of Internal Revenue vs. SM Prime Holdings that the legislative intent is not to impose VAT on persons already covered by the amusement tax, and this holds true even in the case of cinema/theater operators taxed under the Local Government Code of 1991, which provides: "SEC. 140. Amusement Tax . 3 (a) The province may levy an amusement tax to be collected from the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement at a rate of not more than thirty percent (30%) of the gross receipts from admission fees . (b) In the case of theaters or cinemas, the tax shall first be deducted and withheld by their proprietors, lessees, or operators and paid to the provincial treasurer before the gross receipt are divided between said proprietors, lessees, or operators and the distribution of the cinematographic films. cHaCAS xxx xxx xxx" It is clear from the foregoing that the imposition of amusement tax (and thus, the exemption from VAT) is only limited on the gross receipts of cinema, theater operators or proprietors from admission tickets and does not extend to the purchase or lease of cinematographic films. Finally, it is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. One who claims an exemption must be able to justify the same by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications. 4 In view thereof, this Office is of the opinion that the cinema/theater operators or proprietors have no legal basis to claim exemption from the payment of VAT on their lease of cinematographic films. Hence, owners, producers, and lessors of cinematographic films may pass-on the VAT component to cinema/theater operators or proprietors on the sale or lease of cinematographic films. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. G.R. No. 183505, 26 February 2010. 2. Commissioner of Internal Revenue vs. Seagate Technology (Philippines) , G.R. No. 153866 dated February 11, 2005. 3. As amended by Republic Act No. 9640 (An Act Amending Section 140 (a) of Republic Act No. 7160, otherwise known as "The Local Government Code of 1991"). 4. Commissioner of Internal Revenue vs. Isabela Cultural Corporation , G.R. No. 172231 dated February 12, 2007.