VAT Exemption on the Lease of Real Property

July 1, 1988 BIR RULING NO. 292-88 103 (q) 000-00 292-88 Gentlemen : This refers to your letter dated May 13, 1988 requesting reconsideration of the answer to Question No. 13 under Revenue Memorandum Circular No. 20-88 stating: cdtech "Since storage fee is exempt from VAT, "7-R" shall not bill the VAT to the cargo owners. On the other hand, the consideration received by "7-R" from PPA is for rendition of collection service as business agent; hence, subject to VAT." You contended that the aforesaid answer overlooked the following facts: 1) That the storage facilities in the South Harbor and MICT are leased by PPA to you for a fixed annual fee of P30M . irrespective of the amount collected by you from storage charges. 2) That in assessing and collecting storage charges from overstaying cargos, no personnel or employee of PPA, including its General Manager, intervenes in your day-to-day activity. 3) That the storage charges collected by you are for your own account, and not as the collecting agent of PPA. In reply, please be informed that the aforestated answer to Question No. 13 as indicated under Revenue Memorandum Circular No. 20-88 is based on the assumption that the use of Government facility is not a VAT-taxable activity as contemplated in Section 2(h) of Revenue Regulations No. 5-87; that the entity vested with power to collect storage charges is PPA; and that you were engaged by PPA merely to collect storage charges in its behalf. However, on the basis of your disclosure that you may have actually leased Government facilities represented by PPA for a fixed consideration of P30M; and that you are collecting storage charges on your account, the aforesaid rule indicated in the answer to Question No. 13 of Revenue Memorandum Circular No. 20-88 will not apply. By leasing Government facility and operating it for profit; paying the annual rental of P30M. and shouldering the cost of repair and maintenance and still hope to derive gain therefrom, you have, in effect, privatized a Government facility consistent with the rule that public property, e.g. public wharf could be the subject matter of the lease. (Bouvier; 1888) in other words, during the duration of your lease, the storage facilities, cargo sheds, warehouse, or open storage premises ceased to be a Government facility for public use, but a private facility for private enterprise subject to the conditions provided in your lease agreement with PPA. In view thereof, this Office is of the opinion as it hereby holds that 1. The rental of P30M. annually paid by you to PPA arises from lease of real property; hence, exempt from VAT pursuant to Section 103(c) of the Tax Code, as amended by Executive Order No. 273. 2. The storage charges received by you from the cargo owners using the facilities leased by PPA to you are subject to VAT pursuant to Section 102(a) of the same Code. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner