Imposition of VAT on Sale of Machineries by First Unibrand Food Corp. to Nikon Industrial Corp.

April 27, 1999 BIR RULING NO. 057-99 106 (a), (B) (1)-000-00-057-99 Corporate Affairs & Tax Specialists, Inc. 4581 Baron Street Cor. Solchuaga St. Makati City Attention: Atty . Rosendo R . Paug Counsel Gentlemen : This refers to your letter dated March 8, 1999 requesting for a tax ruling as to whether or not FUFC will be allowed to charge a 10% VAT on the proposed sale of its machineries to NIKON. It is represented that Nikon Industrial Corporation (NIKON) is a domestic corporation engaged in the manufacture of appliances, and carry a general mercantile and commercial business; that it is a going concern with an authorized capital stock of Ten Million Pesos (P10,000,000.00), fully subscribed and paid up; that First Unibrand Food Corporation (FUFC) is likewise a domestic corporation incorporated in 1996 by the same principals of NIKON; that it was set up as a manufacturing business with an authorized capital stock of Ten Million Pesos (P10,000,000.00) of which Two Million Five Hundred Pesos (P2,000,500.00) was subscribed and paid up; that due to the Asian crisis, FUFC, at its start-up stage, had to file for a suspension of payment with the Securities and Exchange Commission, and eventually had to suspend its operation during the last quarter of 1997; and that as part of the rehabilitation plan of the Company, NIKON, being the parent company is proposing to buy all the machineries of FUFC. LLphil In reply, please be informed that pursuant to Section 106(B)(1) of the 1997 Tax Code (then Section 100 of the Tax Code, as amended by RA 7716 and further amended by RA 8241, and as implemented by Rev. Regs. Nos. 7-95 and 6-97, respectively), which provides that "(B) Transactions Deemed Sale . The following transactions shall be deemed sale: "(1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business; "xxx xxx xxx" the sale not in the course of business of all the properties which are originally intended for use in the course of business, is transaction "deemed sale" which is subject to VAT under paragraph (A) of the same Section 106 of the 1997 Tax Code. Such being the case, the sale by FUFC of all its machineries to its parent company, NIKON, is subject to the 10% VAT imposed under Section 106(A) of the 1997 Tax Code. Moreover, since VAT is an indirect tax the amount of which may be shifted or passed on to the buyer or transferee of the properties, FUFC may pass on the 10% VAT to NIKON. (Section 105 of the 1997 Tax Code.) Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue