Digest of VAT Rulings for July, August, September, October and November 1990

June 14, 1991 REVENUE MEMORANDUM CIRCULAR NO. 49-91 SUBJECT : Digest of VAT Rulings for July, August, September, October and November 1990 TO : All Revenue Officials and Others Concerned Attached herewith as Annex "A" are the Digests of VAT Rulings issued in the months of December 1990 and January 1991. For the information and guidance of all concerned. acd (SGD.) JOSE U. ONG Commissioner of Internal Revenue ANNEX "A" Digest of Additional VAT Rulings for July, 1990 1. Educational services rendered by private educational institutions duly accredited by the Department of Education, Culture and Sports (DECS),and those rendered by government educational institutions are exempt from VAT pursuant to Section 103(m) of the Tax Code, as amended, subject to the following conditions: a. The VAT exemption is limited only to the school year 1989-1990 mentioned in the DECS Temporary Permit issued therefor. b. The VAT exemption is limited only to the gross receipts from the operation of the educational institution and does not extend to other activities involving sale of goods and/or services. (VAT Ruling No. 187-90 dated July 10, 1990, supports VAT Ruling No. 150-90) 2. Pursuant to Section 103(u) of the Tax Code, transactions, such as importation of equipment used solely for educational and religious purposes and under the provisions of the UNESCO Florence Agreement, classified as "Scientific Instruments or Apparatus" under Annex D(b) which are exempt under international agreements to which the Philippines is a signatory are exempt from VAT. However, when the imported equipment are sold, transferred or exchanged in the Philippines to non-exempt persons and entities, the purchasers, transferees or recipients shall be liable for the payment of the VAT (Section 101(b) of the Tax Code, as amended),and that the Bureau of Internal Revenue (BIR) shall be notified of such transactions. (VAT Ruling No. 191-90 dated July 25, 1990, supports VAT Ruling Nos. 274-89 and 105-90) Digest of VAT Rulings for August, 1990 1. Professional services, such as architectural and engineering services rendered by individuals in the exercise of their professional or performed by registered professional partnerships, are exempt from VAT pursuant to Sec. 103(r) of the Tax Code, as amended. However, architectural and engineering consultancy firms registered as corporations are subject to VAT. (VAT Ruling No. 181-90 dated Aug. 17, 1990) 2. Proprietors or operators of restaurants, refreshment parlors and other eating places are exempt from VAT in accordance with Sec. 103(j) of the Tax Code, as amended. On the other hand, suppliers of processed food items to groceries are subject to VAT pursuant to Sec. 100(a) of the same Code. However, if their gross receipts do not exceed P200,000.00, they are exempt from VAT and subject to 2% on their gross receipts pursuant to Sec. 112 of the same Code. (VAT Ruling No. 182-90 dated Aug. 17, 1990) aisa dc 3. By operation of law, the 10% VAT is always considered passed-on and forms part of the total amount billed by the contractor against the contractee whether the said 10% VAT is billed separately in the invoice or not separately billed. Thus, assuming that the contractor's billing and collection amounts to a total of P110, VAT included, his taxable gross receipts therefor shall be P100, computed as follows: (Total billing/collection of P110 less 1/11th thereof, representing 10% VAT (i.e.,P10) equals taxable gross receipts of P100.) If the contract calls for the contractor to supply both labor and materials, his total billing/collections therefor, excluding 10% VAT, shall be constituted as his taxable gross receipts, hence, it may not be legally contended that only the portion of the total gross receipts, viz.,pertaining to labor component, shall be subject to VAT. Rather, the total amount received from such contract, excluding VAT, is the taxable gross receipts. (VAT Ruling No. 183-90 dated Aug. 17, 1990) 4. Sale of goods to a representative company of a foreign principal, who after shipping the goods, receives payment in US dollars, then pays the goods in pesos, shall be considered local sale subject to VAT under Sec. 100 of the Tax Code, as amended. (VAT Ruling No. 184-90 dated Aug. 17, 1990) 5. Domestic sales of goods manufactured by companies registered and operating within the Bataan Export Processing Zone shall be subject to the rules and regulations governing imported merchandise under Article 77(4) of Executive Order No. 226. Hence, in accordance with Sec. 101 of the Tax Code, as amended, such goods shall be subject to VAT based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges. Furthermore, they shall also be subject to the customs duties and other charges as determined by the Bureau of Customs pursuant to the Tariff and Customs Code. (VAT Ruling No. 185-90 dated Aug. 17, 1990) 6. A general art studio engaged in the business of acting as a consultant, adviser, agent, contractor and provider of art services shall be subject to VAT on its sale of services based on gross receipts. The recording of accounting (journal) entries for commission income and gross receipts therefrom should be consistent wit Sec. 102, of the Tax Code, as amended, i.e. the 10% VAT on the sale of service shall be excluded from the recorded income but shall rather be accounted as output tax. On the assumption that the total billing is P1,100.00, (10% VAT included) the 10% VAT (i.e.,P100.00) shall be excluded in computing the commission income/gross receipts, and, shall be recorded in the Sales Journal, as follows: A. At the time of billing (selling price P1,000 plus 10% VAT, or P100).- The journal accounting entries should be as follows: DR. Account Receivable P1,100.00 CR. Commission income P1,000.00 CR. Deferred Output Tax P100.00 B. Upon collection of the receivable and to take up accrued 10% VAT (Output Tax).- The journal entries should be: DR. Cash P1,100.00 DR. Deferred Output Tax P 100.00 CR. Account Receivable P1,100.00 CR. Output Tax P100.00 The gross taxable receipts, based on the above illustration, is computed as follows: Total Amount collected P1,100.00 Less: 10% VAT Included P 100.00 Gross Receipts P1,000.00 (VAT Ruling No. 186-90 dated Aug. 17, 1990) Digest of VAT Rulings For September 1990 1. The third requirement of Sec. 6(g) of Rev. Reg. No. 5-87 which states that "the contractor has recorded in his books of accounts for the year 1987 the amount receivable," is deemed to have been substantially complied with in inspite of the failure of the contractor, Kawasaki Steel Corp. (KSC), to record the amount receivable from Metropolitan Waterworks and Sewerage System (MWSS) in its books of accounts for such failure was due to the billing policy of the MWSS which is in procedure (as per Implementing Rules and Regulations of P.D. No. 1594). (VAT Ruling No. 192-90 dated Sept. 3, 1990) 2. Refined sugar to be used as raw materials in the manufacture of products for export which may either be exempt or subject to 0% VAT, thus, not resulting in any output tax against which any advance payment of VAT can be credited, can be withdrawn from milling companies as required under Sec. 3 of Rev. Reg. No. 7-89 upon compliance of the following: a. On the basis of the data supplied by the Sugar Regulatory Administration (SRA) on the amount of "D" sugar, quedans properly surcharged by it against the amount allocated to the company, the VAT Division of the BIR shall advise the Revenue District Office (RDO) where the refinery is located of the number of 50 kilo bags of refined sugar that can be withdrawn without the advance payment of VAT. b. Actual withdrawal of refined sugar shall be made only upon (i) issuance by the RDO of the authority to release the allowable quantity of refined sugar to be withdrawn and (ii) presentation by the manufacturer-exporter of the "D" sugar quedan properly surcharged by the SRA to the RDO. After withdrawal and within 10 days after the end of each regular quarter the manufacturer-exporter shall submit to the Chief, VAT Division a copy of the Quarterly Sugar Usage Report (SRA Form No. 003-A) as prescribed by SRA Circular No. 16 and the pertinent supporting papers, including copies of export documents. Finally, VAT registered entities are required to file quarterly VAT returns for their export transaction pursuant to Sec. 100 of the Tax Code, as amended. (VAT Ruling Nos. 193-90, 193-90, 196-90 all dated Sept. 7, 1990 and VAT Ruling No. 198-90 dated Sept. 14, 1990) 7. Sale of vaccines and chemicals to the cooperatives duly registered under Republic Act No. 6938 (Cooperative Code of the Philippines) is subject to VAT pursuant to Sec. 100(a) of the Tax Code, as amended, since the tax exemptions of said cooperatives are limited only to taxes on their sale of goods and services to members and non-members and not extended to their purchases of goods and services. (VAT Ruling No. 188-90 dated Aug. 17, 1990) 8. Previous importations of negative films in bulk which were exempted from sales tax due the nature of the shipments, that is, bulk, which needs to be manufactured into retail form cannot at this time be exempted from VAT for lack of legal basis. (VAT Ruling No. 189-90 dated Aug. 17, 1990) 9. Copra, being an agricultural non-food product is exempt from VAT only if sale is made by the primary producer pursuant to Sec. 103(a) of the Tax Code, as amended. Thus, as a trading company and a subsequent seller, sale of copra is already subject to VAT pursuant to Sec. 9(b)(1) of the Revenue Regulations No. 5-87. (VAT Ruling No. 190-90 dated Aug. 17, 1990, revokes VAT Ruling Nos. 009-88 and 279-88) Digest of VAT Rulings for October and November 1990 1. Persons engaged in the selling of pre-need medical services are considered as persons engaged in the sale of securities, hence they are exempt from VAT but subject to tax at 6% based on gross income as "dealer of securities" pursuant to Sec. 116 of the Tax Code, as amended. (VAT Ruling No. 200-90 dated Oct. 2, 1990; also refer to BIR Ruling No. 546-88) 2. A business league which is not organized for profit, relies solely on the mandatory contributions of its members for its operating expenses, and performs functions exclusively for the benefit of its members, is not considered rendering service in the course of trade or business; hence, it is not subject to VAT imposed under Sec. 102(a) of the Tax Code, as amended. (VAT Ruling No. 801-90 dated October 11, 1990, supporting VAT Ruling No. 861-89) 3. Sales of finished rattan furniture products by a VAT and BOI-registered export producer to export traders, whether BOI or non-BOI registered, does not fall under the category of "export sales",even if the export trader subsequently exports the products. However, the VAT exemption privilege under Sec. 103(u) of the Tax Code, as amended, can be extended to a domestic BOI-registered corporation's sale of rattan furniture products to export traders for the following reasons: cd (1) As a domestic sale by a BOI-registered pioneer enterprise, it is covered by the business/sales tax exemption privilege (to a limited extent in terms of diminishing rates) under Article 46(a) of Presidential Decree No. 1789, and (2) The said exemption privilege is covered by a special law. (VAT Ruling No. 202-90 dated Oct. 12, 1990) 4. Article 77(1) of the Omnibus Investments Code of 1987 (E.O. No. 826) provides that the sale of merchandise to EPZA registered enterprises are considered export sale and subject to zero-rate under Sec. 100(a)(1) of the Tax Code, as amended. The exemption granted under said law is limited only to sales of raw materials, supplies, spare parts, etc. which are directly or indirectly used in the export activity of zone enterprises. Hence, the sale of services to EPZA registered entities are subject to VAT. (VAT Ruling No. 203-90 dated Oct. 16, 1990) 5. Discounts granted to Ice Cream Houses in the form of rebates (determined at the end of the month) for meeting a pre-set monthly quota, cannot be allowed as deductions from the gross selling price for VAT purposes. Sec. 6 of Rev. Reg. No. 5-87 explicitly states that "discounts conditioned upon the subsequent happening of the event or fulfillment of certain conditions, such as prompt payment or attainment of sales goals, shall not be allowed as deductions from the gross selling price for VAT purposes. (VAT Ruling No. 204-90 dated Oct. 16, 1990) 6. Management contracts with affiliates which provide for an agreed management fee for services rendered, such as legal and corporate secretarial works, accounting, personnel and others; and for reimbursement of the expenses incurred in connection with such services, i.e.,salary and fringe benefits (SSS, Medicare, pension/retirement) paid to employees assigned to the managed company, fall within the coverage of VAT. The taxable base is the gross receipts which comprise the management fee and the reimbursement for the expenses incurred for services rendered to such managed corporation. (VAT Ruling No. 205-90 dated Oct. 16, 1990) 7. Pursuant to Art. 46(a) of P.D. No. 1789, the local sales of the BOI-registered pioneer enterprise is exempt from all taxes (including sales taxes, now VAT) except income tax at the same diminishing rates up to the 15th year from the date the area of investment is included in the Investment Priorities Plan pursuant to Sec. 103(u) of the Tax Code, as amended. However, export sales of a BOI-registered enterprise who is also VAT registered, are automatically subject to VAT at zero percent (0%) in accordance with Sec. 100(a)(1) of the same Code. (VAT Ruling No. 206-90 dated Oct. 16, 1990, supports VAT Ruling Nos. 534-88 and 100-89) 8. Sale of technical services made only to one person, the same although only one and isolated transaction, constitutes a sale made in the course of trade or business pursuant to Sec. 99 of the Tax Code, as amended. Whether or not a person is engaged in business is determined by his intent for doing an act or series of acts. An initial or single act may be constituted done in the course of business if the same is done with the intent of carrying on a business. That its transaction was isolated may not, however, detract from the fact that the same was entered into because it was, as it is presently, its line of business. (VAT Ruling No. 207-90, dated Nov. 8, 1990; request for reconsideration of VAT Ruling No. 087-90, dated April 5, 1990 denied for lack of legal basis). 9. The sale of scrap vessels by a company engaged in inter-island shipping business subject to the 3% common carriers tax pursuant to Sec. 115 of the Tax Code, as amended is exempt from the 10% VAT pursuant to Sec. 108(j) of the same Code. The sale is exempt from VAT since such transaction, which is merely incidental to the main line of business, is already a part of the common carriage business rather than another independent business. It is neither subject to the 3% common carriers tax since the percentage tax is levied on the gross receipts representing compensation for the carriage of passenger and/or goods. (VAT Ruling No. 208-90 dated Nov. 15, 1990) 10. A private employment agency is subject to VAT on the total amount of placement fee excluding reimbursable expenses. Such reimbursable expenses shall be limited to fees for passport/visa, medical examination, clearances, inoculation, trade and skill testing, airport terminal, performances bond premiums and notary public, supported by receipts issued by the supplying company or government agency in the name of the applicant-worker. All other receipts or income of said agency shall be subject to VAT. On the other hand, the agency is required to pay the VAT on the entire placement fee including the reimbursable expenses if the above mentioned expenses are supported by the receipts issued in the name of the agency. (VAT Ruling No. 209-90 dated Nov. 16, 1990, supports VAT Ruling No. 087-88) 11. Service fees charged by contractors which are paid in domestic currency and not in foreign currency are not qualified for effective zero rating but instead subject to VAT pursuant to Sec. 102(a) of the Tax Code, as amended. (VAT Ruling No. 210-90 dated Nov. 16, 1990) 12. Importation of dog food is subject to VAT pursuant to Sec. 101(a) of the Tax Code, as amended, and as implemented by Sec. 7(a) of Rev. Reg. No. 5-87. (VAT Ruling No. 211-90 dated Nov. 16, 1990, revoking VAT Ruling Nos. 016-88 and 051-88) 13. Indent commissions received for soliciting orders from local companies which are paid for in foreign currency inwardly remitted to the Philippines in accordance with Central Bank rules and regulations are subject to VAT at zero percent (0%) pursuant to Sec. 102(a)(2) of the Tax Code, as amended. (VAT Ruling No. 212-90 dated Nov. 19, 1990) cd i 14. Commissions of collection agents of a company engaged in a VAT-exempt activity are subject to VAT since such commissions are paid for the performance of services, which are subject to VAT under Sec. 102(a) of the Tax Code, as amended. Sale of books is exempt from VAT pursuant to Sec. 103(f) of the Tax Code, as amended. (VAT Ruling No. 213-90 dated Nov. 19, 1990) 15. A VAT-registered company is directed to pay the VAT on its gross receipts derived from services it renders. However, the VAT, being an indirect tax, may legitimately be passed on to its clients, including the Philippine Navy. (VAT Ruling No. 214-90 dated Nov. 19, 1990) 16. Importation of logs is subject to VAT pursuant to Sec. 101 of the Tax Code, as amended. (VAT Ruling No. 215-90 dated Nov. 19, 1990) 17. Internal revenue taxes on imported goods are to be paid upon withdrawal or removal from customs custody (Hamlin vs. Collector of Internal Revenue, 106 Phil. 723).If imported logs are brought in a Customs Bonded Manufacturing Warehouse and are processed therein, said logs are considered to have not yet been withdrawn or removed from customs custody. Consequently, the said logs are not yet subject to VAT. However, if said imported logs shall be removed from customs custody for local sale, consumption, or processing the same shall be subject to VAT. (VAT Ruling No. 216-90 dated Nov. 19, 1990, supporting VAT Ruling No. 085-90) 18. Outright deduction of the VAT from the invoices of purchased goods for export is not allowed under existing laws. An exporter (whether a trader or a manufacturer of goods),who is a VAT-registered person, can simply apply for the issuance of a tax credit certificate or refund of input taxes attributable to goods exported under Sec. 106(a) of the Tax Code, as amended, with two years from the date of exportation. (VAT Ruling No. 217-90 dated Nov. 19, 1990) 19. The exemption from contractor's tax (now VAT) of a BOI-registered domestic producer is limited only to taxes for which it is directly liable; thus, its purchases of goods and services are not exempt from VAT. Its suppliers of goods and services therefore may pass-on the VAT on the goods and services sold to this BOI-registered domestic producer. (VAT Ruling No. 218-90 dated Nov. 21, 1990) aisa dc 20. The importation of one unit Fuji Xerox Machine by the Asia Foundation is exempt from VAT pursuant to Sec. 103(u) of the Tax Code, as amended, since Asia Foundation was granted tax exemption in the Philippines Diplomatic Note Verbale No. 3001, an international agreement to which the Philippines is a signatory. (VAT Ruling No. 219-90 dated Nov. 27, 1990)