VAT Ruling No. 009-93

March 24, 1993 VAT RULING NO. 009-93 Section 100 (B) (I)-100 (B) (4)-000-00-009-93 Dejoras and Dejoras Certified Public Accountant 1419 Sagat Street Paco, Manila Gentlemen : This refers to your letter dated January 6, 1993 stating that your client, Anna-Lynn's, a duly-registered single proprietorship intends to incorporate; that to capitalize the proposed corporations, your client will transfer all of its assets and liabilities to the proposed corporation, among which are its merchandise inventory. LLpr Based on the foregoing facts, you posed the following queries: 1. "Will the input VAT of the merchandise inventory paid by the single proprietorship be likewise absorbed by the proposed corporation and be available as output tax credit against the proposed corporation's output VAT? 2. "The other incorporators of the proposed corporation will pay their capital contribution in the form of merchandise inventory. Will the input VAT of the merchandise inventory be likewise absorbed by the proposed corporation and also be available as tax credit against the proposed corporation's output VAT? In reply, please be informed as follows: 1. Input tax credit is personal to the taxpayer who generated the same through the purchase of goods or services. However, the transfer of merchandise inventory from the single proprietorship (to be collapsed) to the proposed corporation has the effect of retirement from or cessation of business of the single proprietorship and is deemed sale; hence, subject to 10% VAT pursuant to Section 100 (b) (4) of the Tax Code. However, the VAT payable by the proposed corporation will be net of the available input tax credit of the single proprietorship at the time of transfer. In turn, since the transfer of the merchandise inventory is subject to VAT, the proposed transferee corporation may use the VAT component therein as input tax credit. 2. Payment of capital contributions by the other incorporators in the form of merchandise inventory (without necessarily collapsing their business) is still a deemed sale transaction under Section 100 (b) (1) of the same Code. Accordingly, as in the preceding case, the transferor will be subject to 10% VAT less available input tax credit at the time of transfer. In turn, the transferee corporation, will be able to claim the VAT component on the merchandise transferred as input tax credit. On the other hand, if the incorporator is not engaged in either VAT or non-VAT taxable business, but pays his capital contribution to the proposed corporation in kind, i.e., merchandise obtained on credit, or purchased from third persons engaged in VAT taxable business, the VAT invoice, if issued by the latter in the name of the proposed corporation, will generate input tax credits for the proposed corporation. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue EUFRACIO D. SANTOS Deputy Commissioner (Officer-in-Charge)