Exemption from VAT of Lease of Residential Unit with Monthly Rental Not Exceeding P8,000.00

November 8, 2000 BIR RULING NO. 058-00 Sec. 109 (x) 000-00 Mr. Emmanuel A. Ceidoza 922 Padilla Street San Miguel, Manila S i r : This refers to your letter dated March 23, 2000 stating that Fernandez Hermanos, Inc. owns and leases a five-door apartment along Padilla Street, San Miguel, Manila; that the owner's gross receipts exceed P500,000.00 a year; that you are a tenant of one (1) unit of a 5-unit residential apartment owned by Fernandez Hermanos, Inc.; that you had been in the leased premises since 1955-1999 up to present and your monthly rental started at P120.00 in 1955 and gradually increased over the years until it became P2,831 a month starting 1999; that in 1996, the owner imposed a 10% VAT on your rental payment and the collector refused to accept your payment if VAT is not paid by you; that you presented the owner a copy of RMC No. 3-96 to support your exemption from VAT but to no avail; and that Fernandez Hermanos, Inc. prepared a lease contract allowing the imposition of VAT but you withdrew your signature and asked for the annulment of the lease contract. Based on the foregoing, you are requesting for an opinion whether Fernandez Hermanos, Inc. can legally impose VAT on your rental payment for the lease of one (1) unit residential apartment starting 1996 even if the amount is less than the allowed under the Rent Control Law. In reply, please be informed that Sec. 4.103-1(B)(s) of Revenue Regulations 7-95 which was implemented beginning January 1, 1996 provides that " lease of residential units, boarding houses, dormitories, rooms and bedspaces offered for rent by their owners at a monthly rental of not more than amount under the Rent Control Law (now equivalent to P2,750.00 per month, subject to the annual adjustment provided under the Rent Control Law), shall not subject to VAT ." Upon the effectivity of RA No. 8241 which amended RA No. 7716, Revenue Regulations No. 6-97 was promulgated amending Revenue Regulations No. 7-95 which became effective starting January 1, 1997 and provides in Sec. 4(B)(x) as follows: "(x) Lease of residential units with a monthly rental per unit not exceeding Eight Thousand pesos (P8,000.00), regardless of the amount of aggregate rentals received by the lessor during the year; Provided, That the exemption likewise applies to lease of residential units where the monthly rental per unit exceed Eight Thousand pesos but the aggregate rentals of the lessor during the year do not exceed P550,000. Provided finally, that not later than January 31, 1998 and each calendar year thereafter, the amount of P8,000.00 shall be adjusted to its present value using the Consumer Price Index, as published by the NSO ; aHSTID Under Section 109(x) of the Tax Code of 1997 which became effective on January 1, 1998, it is provided that " lease of residential unit with a monthly rental not exceeding Eight Thousand pesos (P8,000) : . . ." shall be exempt from VAT. Based on the foregoing, Fernandez Hermanos, Inc. has no legal basis to charge you the 10% VAT on your rental payment for the lease of one (1) unit residential apartment. With regard to the remedies available to you and legal sanction against the Fernandez Hermanos, Inc., please be informed that the matters are not within our jurisdiction to decide. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue