VAT Ruling No. 012-05

August 26, 2005 VAT RULING NO. 012-05 Sec. 109 Sec. 5 Gov. Eleandro Jesus F. Madrona Office of the Governor Provincial Capitol Office Romblon, Romblon S i r : This refers to your letter dated June 28, 2003 requesting, in effect, for a ruling that the Province of Romblon, being a political subdivision of the government is exempt from the payment of the value-added tax on the interest on its loans used for non-profit services of the Province. It is represented that the Province of Romblon borrowed two (2) term loans from the Land Bank of the Philippines (Land Bank) one for P3.5 Million which was used to purchase road building and maintenance equipment and the other for P126.5 Million payable in ten (10) years which was used to improve and pave the provincial road network and to improve and augment the bed capacity of provincial hospitals; that for the past two (2) quarters of this fiscal year, the Land Bank is charging your Province 10% value-added tax (VAT) pursuant to Revenue Regulations No. 12-2003 dated January 2, 2003; and that the net result of this increases the interest cost of the Province on its loans with the Land Bank by a very substantial amount. In reply, please be informed that pursuant to Section 5 of Republic Act (R.A.) No. 8424, otherwise known as the Tax Reform Act of 1997, as implemented by Revenue Regulations (Rev. Regs.) No. 18-99, as further amended by Rev. Regs. No. 12-2003, services rendered by financial institutions are subject to value-added tax (VAT) beginning January 1, 2000. However, R.A. No. 9010 which was approved on February 27, 2001, deferred the imposition of the VAT on, among others, services rendered by financial institutions to January 1, 2003. On the year so prescribed, i.e., 2003, VAT was finally imposed on said services of banks, non-bank financial intermediaries performing quasi-banking functions, and other financial intermediaries. CaHAcT On February 5, 2004, RA No. 9238 lapsed into law. It expands the enumeration of transaction exempt from VAT to include the aforementioned services effective January 1, 2004. R.A. No. 9238 was first published in the Manila, Standard on February 16, 2004 and subsequently, in the Official Gazette, Vol. 100, No. 11 on March 15, 2004. In view of the fact that VAT on services rendered by banks was imposed in the interim, i.e., in the year 2003, the rules obtaining at that time should be applied to the transactions the financial institution so had with its clients during that period. Significantly, Revenue Regulations (Rev. Regs.) No. 18-99, as amended by Rev. Regs. No. 12-2003 and which supplements Rev. Regs. No. 7-95 provides that the output tax (VAT) on the services rendered by financial institutions for financial intermediation shall be computed by multiplying the gross receipts from financial intermediation services by 10%. Pursuant to Section 4 of the above Regulations, if you are a VAT-registered person, you are entitled to claim the output tax (VAT) paid by your bank as input tax credit provided that your claim must be supported by a VAT receipt/invoice. If you are not a VAT-registered person, the VAT passed on to you shall form part of your cost. Moreover, the VAT is an indirect tax, payable by the seller and not by the purchaser of goods or services. Being an indirect tax, the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services (Section 105, Tax Code of 1997). Once shifted, it is no longer a tax but an additional cost which the purchaser has to pay to obtain the goods or services ( Philippine Acetylene Co. vs. Commissioner of Internal Revenue , G.R. No. L-19707, August 17, 1967). In view of the foregoing, the Land Bank is correct in charging your Province 10% VAT for the first two (2) quarters of the taxable year 2003 pursuant to R. A. No. 9010. However, beginning January 1, 2004 finance intermediation services rendered by Land Bank are no longer subject to VAT pursuant to R. A. No. 9238. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue