Amending the Tax Code and Providing for Assessments and Classifications of Real Properties of the City of Bogo

September 3, 2009 BIR RULING [DA-(VAT-077) 488-09] RR 4-2007; DA-693-06; DA-029-05; DA-459-04 D.Z. Jugueta & Associates No. 33 West, 9th Ave. Grace Park, Caloocan City Attention: Ms. Divina Z. Jugueta Gentlemen : This refers to your letter dated March 23, 2009 stating that your client, Aurelio Holdings, Inc. (AHI) is a corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Cert. No. 142969. It is engaged primarily in real estate business or in the acquisition and sale of lands and buildings or both for the purpose of leasing them under operating lease agreement. Its principal office is located at 1619 Rizal Ave. Ext. cor. 11th Ave., Caloocan City. In 2007, AHI sold two (2) of its properties, one is covered by Transfer Certificate of Title (TCT) No. 159543 with an area of 650 sq.m. with improvements thereon located at Rizal Ave. cor. 9th Ave., Caloocan City and another is evidenced by TCT No. 159545 with an area of 6,438 sq.m. located at Libis Espina, Caloocan City. The properties were sold at the price of P21,450,000.00 and P15,386,820.00, respectively and the corresponding taxes were paid based on the zonal valuation computed by the Bureau of Internal Revenue (BIR). The expanded withholding tax (EWT) is in the sum of P348,138.76 and documentary stamp tax amounted to P981,735.00. The company also paid the value-added tax (VAT) on the actual selling price which amounted to a total of P4,604,535.09. However, the said company is being assessed P8,727,478.30 deficiency VAT based on the zonal value of the aforesaid properties in the sum of P72,728,986.20. The BIR's Revenue District Office (RDO) assessment was based on Sec. 4 of Revenue Regulations (RR) No. 4-2007 dated February 7, 2007. You now would like to request for a ruling exempting your client from paying the deficiency VAT based on the amount which was not actually received by them. STcADa In reply, please be informed that Sec. 4 of RR No. 4-2007, amending Sec. 4.106-4 of RR No. 16-2005 provides, viz. : "SECTION 4. Gross Selling Price. . . .: SEC. 4.106-4. Meaning of the Term 'Gross Selling Price'. The term "gross selling price" means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding VAT. . . . In the case of sale, barter or exchange of real property subject to VAT, gross selling price shall mean the consideration stated in the sales document or the fair market value whichever is higher. If the VAT is not billed separately in the document of sale, the selling price or the consideration stated therein shall be deemed to be inclusive of VAT. The term 'fair market value' shall mean whichever is higher of: 1) the fair market value as determined by the Commissioner/zonal value, or 2) the fair market value as shown in schedule of values of the Provincial and City Assessors (real property tax declaration). However, in the absence of zonal value/fair market value as determined by the Commissioner, gross selling price refers to the market value shown in the latest real property tax declaration or the consideration, whichever is higher. If the gross selling price is based on the zonal value or market value of the property, the zonal or market value shall be deemed exclusive of VAT. Thus, the zonal value/market value, net of the output VAT, should still be higher than the consideration in the document of sale, exclusive of the VAT." Based on your representation, the aforestated properties are used in the ordinary course of AHI's trade or business, as such the sale thereof is subject to VAT. Pursuant to the above-quoted provisions, the computation of the VAT shall be based on gross selling price or consideration stated in the agreement of sale or the fair market value whichever is higher, and if the VAT is not billed separately in the document of sale, the selling price or the consideration stated therein shall be deemed to be inclusive of VAT. It is to be noted, however, that if the gross selling price is based on the zonal value or market value of the property, the zonal or market value shall be deemed exclusive of VAT. For purposes of taxation, the basis of tax is the fair market value or the consideration of the property/ies stated in the document of sale, whichever is higher as determined in accordance with Sec. 6 (E) of the 1997 Tax Code, as amended and as implemented by RR 4-2007. In the instant case, and as alleged, the zonal value of the two (2) properties in the amount of P72,728,986.20 is higher than the selling price stated in the document of sale which amounts to P21,450,000.00 and P15,386,820, respectively. Thus, for VAT purposes the said values are deemed to be exclusive of VAT, because as a rule, the established zonal value/market value, net of the output VAT, should still be higher than the consideration in the document of sale, excluding the VAT. cCHITA Accordingly, a Certificate Authorizing Registration (CAR) transferring the property from AHI to its buyer should only be issued by the RDO concerned upon showing of proof that the payment of the deficiency VAT based on the zonal value/fair market value has been made by the respective buyers. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service