BIR Ruling No. 520-12

August 22, 2012 BIR RULING NO. 520-12 Sections 30, 105, 106, 107 and 108 Tax Code of 1997, as amended; BIR Ruling No. 075-11; and BIR Ruling No. 157-11 Philippine Society of Mechanical Engineers National Office, Inc. PSME National Headquarters Building 401, Fourth Floor, Don Lorenzo Building, 889 P. Paredes Street, Sampaloc Manila Attention: Liberato S. Virata National President Gentlemen : This refers to your letter dated September 5, 2010 , requesting on behalf of Philippine Society of Mechanical Engineers National Office, Inc. (PSME) for Value Added Tax (VAT) exemption, especially on the pass-on VAT from the suppliers and contractors. It is represented that PSME is a non-stock, non-profit organization that aims to advance and promote the mechanical engineering profession. PSME's operational lifeline is derived from membership dues, donations and contributions. In reply, please be informed that the tax exemption granted to non-stock, non-profit corporation under Section 30 of the Tax Code of 1997 covers only income taxes for which it is directly liable. Section 105 of the Tax Code of 1997 provides that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of the same Code. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. TAEcCS Accordingly, if PSME is engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, in general, it shall be liable for VAT. ( BIR Ruling No. 075-11 dated March 14, 2011 ) Notwithstanding that it is a non-stock, non-profit corporation, its purchase of goods or properties or services and importation of goods shall nevertheless be subject to the 12% VAT pursuant to Section 107 of the said Code. ( BIR Ruling No. 157-11 dated May 19, 2011 ) It should be noted that VAT is an indirect tax payable by the seller and not by 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 it does not make it the person directly liable and therefore, it cannot invoke its tax exemption privilege under Section 30 of the Tax Code of 1997 to avoid the passing on or shifting of the VAT. Revenue from contributions and donations, not being derived from sale of services or sale of goods made in the course of business but rather in connection with its non-stock, non-profit activities, is exempt from the 12% VAT. In view hereof, your request for the issuance of a certificate of VAT exemption is denied for lack of legal basis. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue