Whether the Input VAT Paid on Capital Equipment Imported by Caltex and Used in its VAT-Exempt Operations is Not Deductible from Its Gross Income as Expense but shall be Capitalized Instead as Part of the Costs of the Imported Equipment and taken up as Deductions for Depreciation based on the Useful Life of the Equipment

December 6, 1995 BIR RULING NO. 185-95 29 (c) (1) 202-85 185-95 Caltex (Philippines), Inc. G/F 6750 Ayala Avenue 1226 Makati City Metro Manila Attention: Ms . Catherine T . Manahan Tax Counsel Gentlemen : This refers to your letter dated December 29, 1994, requesting reconsideration of BIR Ruling No. UN-242-94 dated August 5, 1994 to the effect that input VAT paid on the capital equipment imported by Caltex and used in its VAT-exempt operations is not deductible from its gross income as expense but shall be capitalized instead as part of the costs of the imported equipment and taken up as deductions for depreciation based on the useful life of the equipment. In support of your request, you stated that under Section 29(c) of the Tax Code, as amended, and Section 80 of the Income Tax Regulations, taxes are specifically allowed as deductions from the gross income; while depreciation, which is allowed as a deduction under paragraph (f) of said Section 29 of the Tax Code, as amended, takes the form of a reasonable allowance for obsolescence of property used in trade or business; hence, taxes cannot be legally subsumed as cost of the equipment and be part of the deduction for depreciation; that there is no duplication of deduction Caltex deducts input VAT because the base for depreciation allowance is exclusive of customs duties and taxes; and that no input tax credits are derivable therefrom because the capital equipment is purely used by Caltex in the manufacture of VAT-exempt petroleum products. cdtech In reply, please be informed that his Office has consistently ruled that the VAT on purchases of goods and services by non-VAT person cannot generate input tax credit but instead shall form part of the expense or cost of the items purchased, as the case may be. Corollary, the VAT paid on the importation of goods to be used in VAT-exempt operations shall form part of the cost of importation along with the other charges incidental thereto, in consonance with the principle that accessories follow the principal. Thus, if the imported article is a capital equipment, the VAT paid thereon shall necessarily form depreciation. Hence, contrary to your opinion, Section 29(c)(1) of the Tax Code and Section 80 of the Income Tax Regulations cannot be invoked to claim the VAT paid for the adverted importation as deduction from your gross income. Accordingly, we reiterate our ruling (under BIR Ruling No. UN-242-94) that the VAT on capital equipment imported by Caltex in 1993 which was used in its VAT-exempt operations cannot be treated as outright expenses to be deducted from gross income, but should form part of the acquisition cost thereof subject to depreciation over its estimated useful life. llcd Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue