Clarification of Issues Affecting Dealers in Securities and Lending Investors Under Republic Act No. 7716, Otherwise Known as the "Expanded VAT Law"

January 15, 1996 REVENUE MEMORANDUM CIRCULAR NO. 13-96 SUBJECT : Clarification of Issues Affecting Dealers in Securities and Lending Investors Under Republic Act No. 7716, Otherwise Known as the "Expanded VAT Law" TO : All Internal Revenue Officers and Others Concerned Q-1: Are dealers in securities and lending investors liable to pay VAT under R.A. No. 7716? A-1: Yes, dealers in securities and lending investors are liable to pay VAT under R.A. No. 7716. Q-2: What is the meaning of the term "securities"? A-2: The term "securities" means shares of stock in a corporation and rights to subscribe for or to receive such shares. The term includes bonds, debentures, notes or certificates, or other evidence of indebtedness, issued by any corporation, including those issued by a government or political subdivision thereof, with interest coupons or in registered form. Q-3: What is the meaning of the term "dealer in securities"? A-3: The term "dealer in securities" means a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. Q-4: What is the basis of the VAT of dealers in securities? A-4: On sales of securities listed and traded in the local stock exchange, the VAT shall be based on gross income as defined under Sec. 28(a) of the Tax Code derived from their sale or exchange of the listed and traded securities. The term "gross income" means total gross selling price less the total acquisition cost of securities sold for the month or quarter plus any other or incidental income. Where the transaction is done "over-the-counter", the basis shall be the gross income as indicated in the VAT invoice; otherwise, the VAT shall be computed based on 1/11 of the total invoice amount. Q-5: What input taxes can be credited by dealers in securities against their output taxes? A-5: All input taxes provided for in Sec. 104 of the Tax Code may be credited against their output taxes, provided that the substantiation requirements prescribed in Sec. 4.104-5 of Rev. Reg. 7-95 are satisfied. Q-6: Are all transactions involving securities subject to VAT? A-6: No. Transactions of a transferor who is not a dealer in securities under the following cases are exempt from VAT. 1. Judicial sale; 2. Foreclosure by mortgagee or pledgee; 3. Isolated transactions; 4. Distribution of stock dividends or exchange of stocks under a reorganization plan or issuance or additional capital stock; 5. Merger or consolidation; 6. Exchange of convertible currency; 7. Trustee to any bank, trust company, insurance company, any corporation or any broker or dealer; 8. Broker's transaction; 9. Pre-incorporation subscription; Q-7: Are sales, barters or exchanges of shares of stocks listed and traded through the local stock exchange subject to VAT? A-7: It depends. Transactions by dealers in securities are subject to VAT; transactions by non-dealers in securities are exempt from VAT. Q-8: Are sales, barters or exchanges of shares of stocks not listed in the local stock exchange subject to VAT? A-8: It depends. Transactions by dealers in securities are subject to VAT; transactions by non-dealers in securities are exempt from VAT. Q-9: Are Initial Public Offering (IPO) of shares of stocks subject to EVAT? A-9: No. They are subject to percentage taxes of 4%, 2% and 1%, depending on the proportion of the shares of stocks sold, bartered or exchanged to the total outstanding shares of stocks after the listing in the stock exchanges. Q-10: What is the nature of business and the tax liability of pre-need companies? A-10: Pre-need companies shall be considered as dealers in securities and shall be subject to VAT based on their gross income. Gross income shall mean actual receipts on contract price minus contributions to the trust fund to be set up independently as mandated by the Securities & Exchange Commission. The amount of such contribution shall be indicated in the VAT official receipt, otherwise the entire amount shall be subject to VAT. Corollarily, the input tax allowable to the customer shall be based on the amount of the contract price net of the trust fund contribution. Q-11: What is the meaning of the term "lending investors"? A-11: The term "lending investors" include all persons, other than banks, non-bank financial intermediaries, finance companies and other financial intermediaries not performing quasi-banking functions, who make a practice of lending money for themselves or others at interest. Q-12: What is the tax base used in the computation of the VAT liability of a lending investor? A-12: The tax base used in computing the VAT liability is the gross income consisting of interests, fees, charges, and incidental receipts derived from the lending of money. Q-13: What are the sources of the 8% presumptive input tax of dealers in securities and lending investors? A-13: The sources of presumptive input tax of dealers in securities and lending investors are inventories of supplies, materials or goods as of December 31, 1995 for use in the ordinary course of business, a list of which shall be submitted to the BIR on or before January 31, 1996. All revenue officials and employees are hereby enjoined to give this Circular the widest publicity possible. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue