BIR Ruling No. 503-11

December 15, 2011 BIR RULING NO. 503-11 Section 109 (R), 1997 Tax Code; BIR Ruling No. 007-2011; BIR Ruling No. 340-2011; City of Iloilo, et al. vs. Smart Communications, Inc., G.R. No. 167260 C & E Publishing, Inc. 839 EDSA, South Triangle Quezon City Attention: Rose Marie R. Arcilla Treasury Manager Gentlemen : This refers to your letter, dated January 21, 2011, requesting on behalf of C & E Publishing, Inc., confirmation that the sale of its textbooks (local and foreign) and the subscription on its e-journals, as well as e-learning products, are exempt from Value-Added Tax (VAT) imposed under Section 109 (R) of the 1997 Tax Code, as amended. It is represented that C & E Publishing, Inc., with Tax Identification No. (TIN) 000-865-763-000, is a corporation organized and existing under the laws of the Philippines; that it is duly registered with the Securities and Exchange Commission (SEC) under SEC Reg. No. AS093-006602; that it is primarily engaged in the business of publication, importation, distribution, and selling textbooks, reference books and tradebooks to schools and educational institutions through its account executives, bookshops scattered throughout the country, and other distribution networks; and that the company is, likewise, engaged in the online publication and distribution of various educational journals and other online learning series on a subscription basis through the internet, described as follows: a. Online Electronic Journals (E-Journals) through www.ejournals.ph, the company publishes scholarly journals or magazines, catering to both local and foreign journals that can be accessed via electronic transmission. They are specialized forms of electronic documents: they have the purpose of providing material for academic research and study, they are formatted approximately like printed journal articles, the metadata is entered into specialized databases, such a DOAJ or OACI as well as the databases for the discipline, and they are predominantly available through academic libraries and special libraries. The Philippine E-Journals may include e-learning products, library automation and interactive media systems, and online library resources containing databases, e-books, and online journals. aAIcEH b. Electronic Educational Learning Products (E-Learning) A range of computer-based educational products or courseware/software systems that have been designed to reinforce the teaching and learning processes for different subject areas across the Philippine curriculum. Examples of such products are, but may not be limited to, the following: E-Quizzes (automated quizzes that assess the students' mastery of lessons), E-Lessons (multimedia instructional materials that present lessons using an interactive approach), yTeach (a Content Management System that serves as a portal to High School Math and Science E-Lessons), and CE-Learning (a Learning Management System that houses the E-Quizzes and E-Lessons). The products can be accessed by students and teachers through: (1) the Internet; (2) a Local Area Network; or (3) CD-ROMS. The products have also been designed to complement the contents of C & E's textbooks in order to equip teachers and students with a seamlessly integrated set of print and electronic instructional materials. Based on the foregoing representations, you now request for a ruling as to whether the sale by C & E Publishing, Inc. of its textbooks (local and foreign) and the subscriptions on its e-journals, as well as, e-learning products are exempt from VAT. In reply, please be informed that Section 109 (R) of the Tax Code of 1997, as amended, sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin, which appears at regular intervals with fixed prices for subscription and sale, and which is not devoted principally to the publication of paid advertisements is exempt from the imposition of the VAT. In view thereof, C & E Publishing, Inc.'s business of selling books printed in hard copy (local and foreign) is exempt from the payment of VAT and from the 3% percentage tax under Section 116, in relation to Section 109 (V) of the 1997 Tax Code, provided they appear at regular intervals with fixed prices for subscription and sale and which are not devoted principally to the publication of paid advertisements. ( BIR Ruling No. 007-11 dated January 19, 2011) However, with regard to the subscriptions on its e-journals, as well as, e-learning products, this Office had the occasion to rule in BIR Ruling No. 340-2011 dated September 7, 2011, citing VAT Ruling No. 060-97 dated September 30, 1997 and VAT Ruling No. 047-99 dated April 12, 1999, that the term "book" for purposes of the VAT law only applies to printed matters in hard copy. It does not, however, apply to electronic copy of any book or publication, thus: "CD-ROM comes within the purview of the "goods or properties", hence, the sale thereof made in the course of trade or business of the seller is subject to VAT pursuant to Section 99 in relation to Section 100 of the aforesaid NIRC. An electronic copy of any publication does not come within the purview of the terms "books, newspapers, periodicals, magazine, review or bulletin" for the purpose of VAT exemption as provided under Section 103(y) of the aforesaid NIRC. The said terms only apply to printed matters in hard copy as expressly provided therein. The term "book" has been defined as "A literary composition which is printed; a printed composition bound in volume." (Scoville v. Toland 21 Fed. Cas. 864 BLACK'S LAW DICTIONARY) Accordingly, it does not come within the purview of the VAT exemption provided under Section 109 (y), NIRC, as amended by RA No. 8241, and as renumbered by R.A. No. 8424 (now Sec. 109 (R) of the 1997 Tax Code), as follows: cHECAS (y) Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements." In view of the foregoing, the subscriptions on C & E Publishing, Inc.'s e-journals and the sale of its e-learning products, being outside the purview of the term "books or any similar publication" for purposes of Section 109 (R) of the 1997 Tax Code, are subject to the 12% VAT. Thus, it is required to register its business as a VAT business entity and issue a separate VAT invoice/receipt to record such transactions. It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. In City of Iloilo, et al. vs. Smart Communications, Inc., G.R. No. 167260 , dated February 27, 2009, the Supreme Court held that: "The basic principle in the construction of laws granting tax exemptions has been very stable. As early as 1916, in the case of Government of the Philippine Islands v. Monte de Piedad , this Court has declared that he who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be beyond doubt or mistake. This doctrine was repeated in the 1926 case of Asiatic Petroleum v. Llanes , as well as in the case of Borja v. Commissioner of Internal Revenue (CIR) decided in 1961. Citing American jurisprudence, the Court stated in E. Rodriguez, Inc. v. CIR : 'The right of taxation is inherent in the State. It is a prerogative essential to the perpetuity of the government; and he who claims an exemption from the common burden, must justify his claim by the clearest grant of organic or statute law. . . . When exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the claim; it is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported.' In the recent case of Digital Telecommunications, Inc. v. City Government of Batangas, et al., we adhered to the same principle when we said: A tax exemption cannot arise from vague inference. . . . Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax exemption must point to a specific provision of law conferring on the taxpayer, in clear and plain terms, exemption from a common burden. Any doubt whether a tax exemption exists is resolved against the taxpayer." Moreover, VAT is an indirect tax payable by the seller and not the purchaser of goods. However, being an indirect tax, it can be shifted or passed on to the buyer/purchaser, transferee or lessee of the goods, properties or services. Once shifted to the buyer/customer as an addition to the cost of goods or services sold, it is no longer a tax but an additional cost which the buyer/customer has to pay in order to obtain the goods or services. Thus, the shifting of the VAT to C & E Publishing, Inc. does not make it the person directly liable and therefore, it cannot invoke its tax exemption privilege under Section 109 (R) of the Tax Code of 1997, as amended, to avoid the passing on or shifting of the VAT. Hence, notwithstanding that C & E Publishing, Inc. is a publication company, its purchases of goods, properties or services from its suppliers shall nevertheless be subject to the 12% VAT pursuant to Section 107 of the same Code. BIR Ruling No. [(DA-VAT-008) 030-10] dated February 18, 2010. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. DcCEHI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue