Reyes Tacandong & Co.

June 16, 2020 BIR RULING NO. VAT-0331-2020 Sec. 39 & 106 (B) (1);000-00 Reyes Tacandong & Co. Citibank Tower 8741 Paseo de Roxas Makati City 1226 Attention: Atty. Rafael Vinzon Tax Services Gentlemen : This refers to your letter dated April 11, 2017 requesting on behalf of your client, Total Philippines Corporation for confirmation of your opinion that: 1) Pursuant to the Deed of Sale executed between Total Philippines Corporation with Filoil Energy Company, the sale of the service gas stations is subject to value-added tax, it being a transaction deemed sale under Section 106 (B) (1) of the National Internal Revenue Code of 1997, as amended; and 2) The assignment of goodwill is not subject to VAT as it is an assignment of a capital asset. As represented, Total Philippines Corporation is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines with registered address at 7th Floor, 11th Corporate Center, 11th Avenue corner Triangle Drive, North Bonifacio, Bonifacio Global City, Taguig City. HTcADC On July 8, 2016, 1 Total Philippines Corporation and Filoil Energy Company executed a Deed of Absolute Sale covering the following service stations: Station Name Station Address Market Value in Pesos Calasiao, Pangasinan National Road, Mancup, Calasiao, Pangasinan, (Galaxi-Calasiao) Malasiqui Malasiqui, Pangasinan San Manuel, Pangasinan San Manuel, Pangasinan FBT-Abulug Brgy. Libertad, Abulog, Cagayan FBT-Buguey Brgy. Pattao, Buguey, Cagayan FBT-Solana Brgy. Lingu, Solana, Cagayan FBT-Bayombong Luyang, Bayombong, Nueva Vizcaya FBT-Solano Poblacion North, Solano, Nueva Vizcaya FBT-Cabatuan Brgy. Diamantina, Cabatuan, Isabela FBT-Jones Brgy. 1, Jones, Isabela Balanga-Roman Hi-way Roman National Highway, Brgy. Tuyo, Balanga, Bataan CABCABEN Cabcaben, Mariveles, Bataan Cabcaben 2 National Road, Cabcaben, Mariveles, Bataan FBT-Abucay Wakas Capitangan Abucay, Bataan FBT-Bagac Brgy. Poblacion, Bagac, Bataan FBT-Limay P. Enriquez St. cor. National Road, Brgy. Townsite, Lima, Bataan FBT-Orani Brgy. Tugatog, Orani, Bataan FBT-Palihan Brgy. Palihan, Hermosa, Bataan FBT-Pilar, Bataan Brgy. Poblacion, Pilar, Bataan (Alauli) FBT-Samal Sta. Lucia, Samal, Bataan Orani Brgy. Apollo, Orani, Bataan General Luis 3106 Sto. Rosario St.,Purok 3, Mapulang Lupa, Valenzuela City Camarin Ilang-ilang St.,Cor. Magnolia, Camarin, Caloocan City Sta. Mesa 4872 Old Sta. Mesa Road, Sta. Mesa, Manila (City Oil-Sta. Mesa) FBT-San Agustin Dubduban, San Agustin, Romblon Brooke's Point Brooke's Point, Palawan Culion Culion, Palawan FBT-Dumaran Brgy. Sta. Teresita, Dumaran, Palawan FBT-Quezon Quezon, Palawan FBT-San Vicente Poblacion, San Vicente, Palawan FBT-Taytay Abongan Brgy. Abongan, Taytay, Palawan FBT-Taytay Rotunda Poblacion, Taytay, Palawan Irawan Purok Pag-Asa, Irawan, Puerto Princesa, Palawan Puerto Princesa Brgy. Tiniguiban, Puerto Princesa, Palawan Sta. Lourdes Brgy. Sta. Lourdes, Puerto Princesa City, Palawan Sta. Monica National Hi-way, Brgy. Sta. Monica, Puerto Princesa City, Palawan Tiniguiban National Hi-way, Brgy. Tiniguiban, Puerto Princesa City, Palawan FBT-Caminawit Caminawit, Bubog, San Jose, Occidental Mindoro FBT-Central Central, San Jose, Occidental Mindoro FBT-Labangan Labangan, San Jose, Mindoro Occidental FBT-Ligaya Ligaya, Sablayan, Occidental Mindoro Rizal, Occ. Min. Rizal St.,San Jose, Occidental Mindoro Barangka 1 A. Bonifacio Ave. Cor. Marcos Highway, Barangka, Marikina City J.P. Rizal J.P. Rizal Street, Malanday, Marikina City Malinta Brgy. Paso De Blas, Valenzuela City Cainta A. Bonifacio Ave.,Brgy. San Juan, Cainta, Rizal FBT-Rodriguez Sitio Harangan, San Isidro, Rodriguez, Rizal FBT-San Mateo Gen. Luna St.,Banaba, San Mateo, Rizal L. Wood 163 L. Wood St.,Dolores, Taytay, Rizal 1920 Morong San Pedro, Morong, Rizal Tanay F.T. Catapusan St.,Brgy. Plaza Aldea, Tanay, Rizal Taytay-Hiway 2000 Hi-way 2000, Batong Dalig, San Juan, Taytay, Rizal Taytay-Rizal Ave. J.P. Rizal Street, San Juan, Taytay, Rizal FBT-Pagsanjan Sampaloc, Pagsanjan, Laguna FBT-Pangil Brgy. Isla, Pangil, Laguna FBT-Victoria Brgy. Masapang, Victoria, Laguna Calaca Expired Shell, Calaca, Batangas FBT-Lemery Ilustre Ave.,Brgy. Palanas, Lemery, Batangas Gulod Brgy. Gulod, Labac, Batangas City, Batangas Lemery Ex-Caltex, Lemery, Batangas Nasugbu-Pob. F. Castro Street, Poblacion, Nasugbu, Batangas Nasugbu-Wawa Brgy. Wawa, Nasugbu, Batangas Sta. Clara Sta. Clara, Batangas City, Batangas Darasa Darasa, Tanauan, Batangas Lipa City National Road, Brgy. Banay-Banay, Lipa City, Batangas Suplang Plantation Hills, Brgy. Suplang, Tanauan, Batangas FBT-Boac Brgy. Santol, Boac, Marinduque FBT-Buenavista Sitio Putat, Caigangan, Buenavista, Marinduque FBT-Mogpog Market Site, Poblacion, Mogpog, Marinduque FBT-Sta. Cruz 1 Brgy. Manlibunan, Sta. Cruz, Marinduque Gasan Brgy. Uno, Gasan, Marinduque Sta. Cruz Pob. Maharlika, Sta. Cruz, Marinduque Torrijos Poblacion, Torrijos, Marinduque Baco Poblacion, Baco, Oriental Mindoro Bongabong Brgy. Bagong Bayan, Bongabong, Oriental Mindoro Bongabong 2 Brgy. Kaligtasan, Bongabong, Oriental Mindoro Calapan Brgy. Bayanan I, Calapan City, Oriental Mindoro FBT-Calapan Calapan City FBT-Puerto Galera Brgy. Minolo, Puerto Galera I, Oriental Mindoro FBT-Socorro Brgy. Catiningan, Socorro, Oriental Mindoro Roxas, Oriental Mindoro Brgy. Sta. Fe, Roxas, Oriental Mindoro FBT-Pili New San Roque, Pili, Camarines Sur FBT-Tabaco Brgy. San Lorenzo, Tabaco, Albay Legazpi Cabangan West, Legazpi, Albay FBT-Aroroy Luy-a Brgy. Luy-a, Aroroy, Masbate FBT-Cataingan Brgy. Poblacion, Cataingan, Masbate FBT-Cawayan Brgy. Mahayahay, Cawayan, Masbate FBT-Palanas Brgy. Nabangig Palanas, Masbate FBT-Pio V. Corpuz Brgy. Manaay, Pio Y Corpuz, Masbate FBT-Umabay Brgy. Umabay Exterior, Mobo, Masbate FBT-Uson Brgy. Buenavista, Uson, Masbate Pinamarbuhan Brgy. Pinamarbuhan, Mobo, Masbate Ticao Calipat-an, San Jacinto, Masbate FBT-Kalibo Terminal Oyo Torong Extn.,Bachao/Bacjao Sur, Kalibo, Aklan FBT-Cagay Brgy. Cagay, Roxas City, Capiz Atabay Atabay, San Jose, Antique FBT-Belison Brgy. Poblacion, Belison, Antique FBT-Hamtic Brgy. Calala, Hamtic, Antique FBT-Pandan Brgy. Nauring, Pandan, Antique FBT-Patnongon Brgy. Apgahan, Patnongon, Antique FBT-San Angel San Angel, San Jose, Antique FBT-San Remigio Iverson Road, Poblacion, San Remegio, Antique FBT-Sibalom 1 District 01 Poblacion Sibalom, Antique FBT-Sibalom 2 Cubay, Napultan, Sibalom, Antique FBT-Tibiao Malabor, Tibiao, Antique FBT-Jordan Rizal, Jordan, Guimaras FBT-Pina Brgy. Pina, Buenavista, Guimaras FBT-Batad Pablacion, Batad, Iloilo FBT-Lambunao Poblacion Ilawod, Lambunao, Iloilo FBT-Mina Cabalabaguan, Mina, Iloilo FBT-Pototan F. Parcon St.,Pototan, Iloilo Cadiz Cabahug St.,Brgy. Zone 5, Cadiz City, Negros Occidental Escalante Old Poblacion, Escalante, Negros Occidental FBT-Cadiz Brgy. Caduha-an, Cadiz City, Negros Occidental Manapla Purok Suhaga, Brgy. I-A Manapla, Negros Occidental Sagay Brgy. Paraiso, Sagay, Negros Occidental Bacolod-Magsaysay Magsaysay St.,Brgy. Zone 6, Talisay City, Negros Occidental FBT-Murcia Brgy. Salvacion Murcia, Negros Occidental Gatuslao Gatuslao St.,Bacolod City, Negros Occidental Gonzaga Gonzaga cor. Mabini St.,Brgy. 24, Bacolod City, Negros Occidental Libertad Cor. Smith Locsin-Libertad Streets, Bacolod City, Negros Occidental Luzuriaga Brgy. 13, Luzuriaga St.,Reclamation Area, Bacolod City, Negros Occidental Mansilingan Mansilingan, Bangga Pare, Bacolod City, Negros Occidental Hinigaran Hinigaran, Negros Occidental La Carlota Cor. Yunque-Gurrea Streets, La Carlota City, Negros Occidental Bagacay Brgy. Bacagay, Dumaguete City, Negros Oriental FBT-Amlan 1 National Highway, Mag-abo, Amlan, Negros Oriental FBT-Amlan 2 Filoil Depot, Amlan, Negros Oriental FBT-Bacong Banilad, Bacong, Negros Oriental FBT-Batinguel Crossing Taclobo, Lower Batinguel, Dumaguete, Negros Oriental FBT-Jimalalud North Poblacion, Jimalalud, Negros Oriental FBT-Manjuyod Suba Manjuyod, Negros Oriental FBT-Perdices Perdices St.,Calindagan, Dumaguete City Looc Brgy. Piapi, Looc, Dumaguete, Negros Oriental Taclobo (HMT Dumaguete City) Valencia Trenz, Valencia City, Negros Oriental FBT-Daan Bantayan Tapilon, Daan Bantayan, Cebu Liloan Nat'l Highway, Brgy. Yati, Liloan, Cebu Mandaue Subang Daku, Mandaue, Cebu FBT-Alcantara Poblacion, Alcantara, Cebu Bien Unido Brgy. Nueva Esperanza, Bien Unido, Bohol Catigbian Catigbian, Bohol FBT-Bilar Cansumbol, Bilar, Bohol FBT-Dauis Brgy. Mariveles, Dauis, Bohol FBT-Guindulman Brgy. Tabajan, Guindulman, Bohol FBT-Jagna Brgy. Looc, Jagna, Bohol FBT-Panglao Brgy. Tawala, Panglao, Bohol FBT-Pilar Bohol Brgy. Poblacion, Pilar, Bohol FBT-Talibon 1 San Isidro, Talibon, Bohol FBT-Talibon 2 Poblacion, Talibon, Bohol Loay Poblacion Ibabao, Loay, Bohol Tagbilaran Dampas, Tagbilaran City, Bohol FBT-Alang-alang Brgy. Bunol Alangalang, Leyte FBT-Burayan Brgy. 83, Burayan, San Jose, Tacloban City, Leyte FBT-Jaro Macopa, Jaro, Leyte FBT-Tolosa Brgy. Doa Brigida, Tolosa, Leyte Tacloban Brgy. 92, Apitong, Tacloban City, Leyte FBT-Isabel Sto. Nio, Isabel, Leyte FBT-Bontoc Brgy. Divisoria, Botoc, Southern Leyte FBT-Sogod Zone 1, Sogod, Southern Leyte FBT-Bacolor Cabambangan, Bacolor, Pampanga FBT-Lubao San Nicolas 1st, Lubao, Pampanga Lubao-San Roque San Roque Arbol, Lubao, Pampanga Aliaga Poblacion West III, Aliaga, Nueva Ecija Talavera National Road, Talavera, Nueva Ecija FBT-Gapan Sta. Cruz, Gapan, Nueva Ecija Sta. Rosa National Road, Sta. Rosa, Nueva Ecija Bocaue Eusebio Roque Ave.,Caingin, Bocaue, Bulacan FBT-Guiguinto Cagayan Valley Road, Sta. Rita, Guiguinto, Bulacan Tambobong Bocaue, Bulacan FBT-Carriedo Carriedo, Muzon, San Jose Del Monte, Bulacan FBT-Dulong Bayan Dulong Bayan (Karyapay),SJDM, Bulacan FBT-Prenza Prenza 1, Marilao, Bulacan FBT-San Rafael 1 Brgy. Cruz na Daan, San Rafael, Bulacan FBT-San Rafael 2 Pantubig, San Rafael, Bulacan FBT-Sta. Maria 1 Matimyas St.,Sta. Cruz, Sta. Maria, Bulacan Sta. Maria 3 Bagbaguin, Sta. Maria, Bulacan FBT-Bagong Ilog Corner Pasig Blvd. & Sgt. Pascua Streets, Bagong Ilog, Pasig City Shaw Pasig Blvd.,Brgy. Pineda, Pasig City Eusebio Lit. A. Eusebio Ave.,San Miguel, Pasig City 1600 Manggahan Amang Rodriguez Avenue, Manggahan, Pasig City Velasco 111 Urbano Velasco Avenue, Pinagbuhatan, Pasig City FBT-Area 1 Brgy. Sta. Lucia, Dasmarias, Cavite FBT-Bulihan B42 L18 Brgy. Acacia, Bulihan, Silang, Cavite FBT-GMA Palawan Cor. Visayas Aves.,Maderan, GMA, Cavite GMA GMA Cavite Gen. Trias-Priza Bonifacio St.,Brgy. Priza, General Trias, Cavite Molino Jomil Bldg. Rd. Molino IV, Bacoor, Cavite 4102 Sta. Maria 2 Gov. Halili Ave.,Brgy. Parada, Sta. Maria, Bulacan San Nicolas 1 Brgy. 22, San Guillermo, San Nicolas, Ilocos Norte San Nicolas 2 23, Sta. Cecilia, San Nicolas 2, Ilocos Norte Buenavista Caigangan Buenavista, Marinduque Liboro Liboro St. Brgy. Pag-asa, San Jose, Occidental Mindoro Payompon Brgy. Payompon, Mamburao, Occidental Mindoro FBT-Calindagan Brgy. Calindagan, Dumaguete City, Negros Oriental Rizal, Palawan Punta Baja, Rizal, Palawan Bubog Bubog, Guimaras Magsaysay Tabuk, Kalinga SJC-Poblacion Rizal St. Barangay 1 (Pob.),San Jose, Mindoro Occidental, Philippines TOTAL MARKET VALUE As a result of the sale of the service stations, the business of Filoil Energy Company was effectively transferred to TOTAL PHILIPPINES CORPORATION, which necessarily included the goodwill that was acquired during the operation and management of Filoil Energy Company. In reply, please be informed as follows: Goodwill is a capital asset only on the part of Total Philippines Corporation. As enunciated in WM H. Anderson vs. Juan Posadas, Jr., G.R. No. 44100, September 22, 1938 , viz .: "The phrase 'good will' is defined in 28 Corpus Juris, 729, Section 1, as follows: Goodwill may be defined to be the advantage or benefit which is acquired by an establishment, beyond the mere value of the capital stock, funds, or property employed therein in consequence of the general public patronage and encouragement which it receives from constant or habitual customers on account of its local position or common celebrity or reputation for skill, affluence, punctuality, or from other accidental circumstances or necessities, or even from accident partialities or prejudices. .. According to the above-quoted definition, goodwill is the reputation of good name of an establishment. If the goodwill, that is, the good reputation of the business is acquired in the course of its management and operation, it does form part of the capital with which it was established. It is an intangible moral profit, susceptible of valuation in money, acquired by the business by reason of the confidence reposed in it by the public, due to the efficiency and honesty shown by the manager and personnel thereof in conducting the same on account of the courtesy accorded its customers, which moral profit, once it is valuated and used, becomes a part of the assets." This office agrees that goodwill forms part of the capital with which it was established and once it is valuated and used, becomes a part of the assets. The Office further agrees that goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized [Philippine Financial Reporting Standards 3 (Revised)].It is an intangible asset which cannot exist independently of the business. It cannot be sold, purchased or transferred separately without carrying out the same transactions for the business as a whole. Goodwill is tagged to a company or business and cannot be sold or purchased independently . Thus, on the part of the seller, Filoil Energy Company, the amount paid for "goodwill" is part and parcel of the selling price. This is consistent with Philippine Financial Reporting Standards 3 (Revised) that goodwill is tagged to a company or business (which is an ongoing concern) and cannot be sold or purchased independently. aScITE A capital asset is defined negatively in Section 39 (A) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended and as implemented by Section 2 (a) of Revenue Regulations (RR) No. 7-2003: "SECTION 39. Capital Gains and Losses. (A) Definitions. As used in this Title (1) Capital Assets. The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business),but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer." Therefore, on the part of the purchaser, Total Philippines Corporation, goodwill is a capital asset since (1) it is not included in stock in trade which would properly be included in the inventory at the close of the taxable year, (2) it is not held primarily for sale to customers in the ordinary course of his trade or business, (3) it is not a property used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (f) of Section 34 of the Tax Code, and (4) it is not a real property used in the trade or business. The sale of the service gas stations is subject to VAT under Section 105 of the Tax Code of 1997, as amended. Section 105 of the National Internal Revenue Code of 1997, as amended, provides "SEC. 105. Persons Liable. 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 this Code. xxx xxx xxx The phrase "in the course of trade or business" means 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. xxx xxx xxx" In relation thereto, Section 14 (B) (p) (1), RR 4-2007 states "Section 14. VAT-EXEMPT TRANSACTIONS. Sec. 4.109-1(B)(1) of RR No. 16-2005 is hereby amended to read as follows: "SEC. 4.109-1. VAT-Exempt Transactions. x x x. (B) Exempt transactions. Subject to the provisions of Sec. 4.109-2 hereof, the following transactions shall be exempt from VAT: xxx xxx xxx (p) The following sales of real properties are exempt from VAT, namely: (1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer's main business ." The service gas stations, although not primarily held for sale or lease to customers, are ordinary assets used by Filoil Energy Company in its ordinary course of business. Applying Section 105 of the Tax Code of 1997, as amended, in relation to Section 14 (B) (p) (1) of RR 4-2007, the sale of the service gas stations of Filoil Energy Company to Total Philippines Corporation is subject to VAT, it being a transaction incidental to the pursuit of Filoil Energy Company's commercial and economic activity. Based on the foregoing, this Office is of the opinion that the total amount paid, including the amount pertaining to assigned goodwill, by Total Philippines Corporation to Filoil Energy Company is subject to VAT pursuant to Section 105 of the 1997 Tax Code, as amended. HEITAD This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Amended on January 18, 2017 to reflect the updated purchase price.