Solutions and Innovations, Inc.

February 20, 2007 VAT RULING NO. 002-07 Sec. 108 001-01 Solutions and Innovations, Inc. 10th Floor Philcom Building 8755 Paseo de Roxas Makati City Attention: Mr. Bernardo D. Lim Treasurer Gentlemen : This refers to your letter dated July 26, 2006 stating that your company is a value-added tax (VAT) registered company and is a duly bonded and licensed private security agency authorized to render private security services; that it is the holder of National License to Operate No. PSA-2320-2003 valid until February 10, 2006 issued by the Philippine National Police; that it has ceased operation last December 31, 2005 and that on March 3, 2006, a Bulk Sales Agreement was executed by and between Solutions and Innovations, Inc., as the Seller, and Lion Integrated Services, Inc., as the Buyer, whereby the seller offered to sell to the buyer its property and equipment, service contracts/agreements and intangible assets such as its trade name, licenses, patents and other intellectual property, used in or relating to its business. That the schedule of the properties sold is as follows: Service Contracts/Agreements P4,880,000.00 Property and Equipment: Firearms P437,600.00 Communication 741,700.00 Transport 684,500.00 Office 597,000.00 Metal Detectors 19,200.00 2,480,000.00 Total Selling Price P7,360,000.00 =========== Based on the foregoing representations, you now request for a ruling as to whether or not the sale of the service contracts of the company is subject to VAT. In reply thereto, please be informed that since your business involves the sale of service you are taxed on your gross receipts. When you enter into a service contract with your clients, you are obligated to render services for which you expect to be paid for your services. The VAT shall be imposed when you actually or constructively receive the payments from your clients. Section 108 of the National Internal Revenue Code, as amended, defines gross receipts in this wise: "The term ' gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax." It is clear from this definition that until the contract price is actually or constructively received in cash or property, it is not subject to VAT. Accordingly, when the security agency turns around and sells its service contract to somebody who will render the agreed service in its behalf, there is a receipt from the contract making the seller taxable. This is an advance payment of services to be performed for another person, although the one making payment is now the one who will perform the services due to subrogation. Hence, the sale of service contracts results to taxable gross receipts on the part of Solutions and Innovations, Inc. aDHCEA The bulk sale that your company entered into may also be viewed as sale of goods and properties by a VAT-registered person. Although the seller is not classified for VAT purposes as a seller of goods and properties but as seller of services, its sale of these goods and properties which are used in business is subject to VAT because these are transactions incidental to its business as a VAT taxpayer pursuant to Section 105 of the National Internal Revenue Code. This means that all the goods and properties sold as embodied in your schedule of properties you submitted to this Office, are subject to VAT. SUCH BEING THE CASE , the sale of service contracts by your company to Lion Integrated Services, Inc., is subject to VAT imposed under Section 106 and/or 108 of the National Internal Revenue Code. Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner