Film Owners Leasing their Films on a Gross Receipts Sharing Basis are Subject to VAT

May 4, 1989 BIR RULING NO. 096-89 99 000-00 096-89 Gentlemen : This refers to VAT Ruling No. 091-89 dated April 3, 1989 to the effect that (1) film producers/owners/importers who share their gross sales on a percentage basis with owners or operators of moviehouses as well as (1) film producers/owners/importers who rent or lease moviehouses on a flat rental basis for exhibition of their films under categories 3 and 4 of your letter dated February 6, 1989 are exempt from the value-added tax. It appears that in granting the said exemption, the aforementioned ruling sustained your contention that under categories 3 and 4, the film producers/owners/importers neither sell any goods nor render any service which are the factors that determine the coverage of VAT; and that said taxpayers do not rent out any equipment but merely exhibited images of people, places and events not classified or enumerated among those covered by VAT. In connection therewith, please be informed that after a restudy, this Office finds your contention not well-taken. It is noted that under the foregoing instances, while it is alleged that the film producers/owners/importers merely rent or lease the moviehouses, the transaction is in reality, a lease of cinematographic film. If the rule is otherwise, there will be no more occasion to impose the VAT thereby resulting in tremendous loss of revenue to the Government. This is so because, in your letter dated February 6, 1989, you admitted and confirmed that film producers/owners rent or lease their films to interested parties on a flat rental basis; hence, they are subject to VAT. Consequently, to evade payment of the VAT, the film producers/owners can make it appear that they are renting or leasing the moviehouses on a flat rental basis. Similarly, contrary to your contention, it is the proprietor or operator of the moviehouse who actually exhibits the images of people, places and events utilizing for this purpose the cinematographic films, rented or leased to him by the film producers/owners either on a flat rental or sharing in the gross sales on percentage basis. Moreover, in a ruling issued on January 17, 1989, this Office held that film owners leasing their films on a gross receipts sharing basis are subject to VAT. This Office finds no cogent reason to justify a revision of said ruling; hence, the same squarely applies to the above categories 3 and 4 covered by VAT Ruling No. 091-89. Accordingly, adhering to the settled rule in statutory construction that claims for tax exemption must be construed strictly against the taxpayer and liberally in favor of the Government, VAT Ruling No. 091-89, insofar as it concerns categories 3 and 4, is hereby revoked. Very truly yours, (SGD.) JOSE U. ONG Commissioner