VAT Ruling No. 013-92

February 12, 1992 VAT RULING NO. 013-92 Secs. 100, 102, 104, 107; 000-00 Mr. Danilo Moncano Actg. Revenue District Officer RDO No. 81, BIR, Bayugan Agusan del Sur Sir : Following are the answers to your questions submitted on November 7, 1989. QUESTION NO. 1: "A" made an initial investment amounting to P500,000 as a dry goods dealer. He did not register as VAT. The RDO upon learning of his investment insisted that he is required to register for VAT purposes since the RDO reasoned out that a businessman will not make such a substantial investment if there is no expectation of sales of P200,000 or more. The taxpayer refuses to register since the taxpayer claimed that he may not exceed the P200,000 ceiling. Anyway, the taxpayer claims that he will register for VAT purposes as soon as his sales exceed P200,000. (a) Whose expectation shall prevail in relation to the need to register? (b) Will it be better if the basis of the requirement for VAT registration will be the capital investment which is more objective than the annual gross sales/receipts? DHSaCA ANSWER: a) A person first beginning in the business of selling goods/services subject to VAT (under Sections 100 and 102 of the NIRC and, who expects to realize gross sales/receipts not exceeding P200,000 for his 12-month operations, has a legal option whether to register as a VAT or a non-VAT person. If he registers as a VAT person, he shall be subject to 10% VAT against which he shall be entitled to deduct, as input taxes the VAT on his purchases. If he registers as a non-VAT person, he shall not be subject to 10% VAT but to the percentage tax at 2% but without the benefit of input tax credit vis-a-vis his purchases. If he opted to register as non-VAT person, he shall lose such status if, during any month of the said initial 12-month period, his gross sales/receipts shall have exceeded the said P200,000 ceiling. In this event, he must register as a VAT person within thirty (30) days after the end of the month when his accumulated sales/receipts exceeded the P200,000 ceiling. He shall become liable to 10% VAT beginning with the first day of the month following the close of the said 30-day notice within which he is required by law to register as a VAT person. (SEC. 18 (a), Revenue Regulation 5-87) ILLUSTRATION. The taxpayer first begun his business on January 1, 1988. He opted to register as a non-VAT person. As of March 1, 1988 his gross sales/receipts, already exceed the P200,000 ceiling. This means he already lost his status as a non-VAT person. Within 30 days reckoned from March 1, 1988 he must register as a VAT person. The 30th day for VAT registration ends by March 30th. This means that beginning March 31 ( i.e., the 1st day following the close of the 30-day registration period) he already becomes liable for 10% VAT. The taxpayer's compliance with the said registration requirement is only a formality, i.e., for records and monitoring purposes. It is the gross amount of his sales/receipts that establishes his becoming liable to 10% VAT; hence, upon this event, he becomes liable to 10% VAT whether or not he actually complies with the registration requirement. b) The taxpayer's capitalization is not a basis in determining how the said taxpayer shall exercise his option. Rather, the basis of his action is contingent upon his personal expectation regarding the amount of gross sales/receipts that he may possibly realize during the initial 12-month period. Wherefore, it is a personal judgment of the taxpayer on which the BIR may not legally interfere. Hence, the said taxpayer may not be forced by the BIR to register as a VAT person if his judgment is to register as a non-VAT person. Your recommendation to change the basis of determination, i.e., from the present gross sales/receipts system to the initial capital resources, will require amendment of the Tax Code and the corresponding implementing regulations. Granting, for the sake of argument, that your suggested basis may be more relevant, the same may not, however, be enforced unless, there is such amendment as mentioned in the immediately preceding statement. QUESTION NO. 2: A person purchased capital goods (truck) on January 1, 1989 and commence his business operation on February 1, 1989 as a dealer of non-food products lumber. Acquisition cost of the truck is P550,000 (VAT inclusive from a VAT (truck) dealer. The lumber dealer paid 2% on his gross sales. Estimated life of the truck is 4 years. On April 1, 1991 he registered as a VAT. (a) Since application for tax refund of a newly registered person can be applied only after the expiration of 180 days from the date of registration or actual commencement of business operation whichever comes late, can he file a claim for refund on the unexpired portion of the input tax he paid to acquire the truck? If the answer is no, give reason. ANSWER: (a) A non-VAT person is not entitled to recognize input tax credits on his VAT purchases, since this credit benefit is allowable only to a VAT-registered person. (See Sec. 104, NIRC) The 10% VAT on purchases/importations made by a non-VAT person is only chargeable against his operations, i.e., as deduction from gross income, for income tax purposes. (See Sec. 12, Regulations No. 5-87) Relative to your illustration, the subject taxpayer purchased a delivery truck on January 1, 1989, inclusive of 10% VAT. He was a non-VAT person from January 1, 1989 to March 31, 1991. On April 1, 1991 he registers as a VAT person. Please be informed that there are two distinct transitory laws on input tax credits for beginning inventory, viz., (1) on the transition from the old sales/percentage tax law into the VAT law, effective January 1, 1998 (Sec. 25, E.O. 273 and (ii) during effectivity of the VAT law, on the transition of a non-VAT person into a VAT person. (See Sec. 105, NIRC) DTEcSa From the facts available, your illustration is embraced by the law on transitory input tax credits under Sec. 105, NIRC, which allows a transitory input tax credit only with respect to the VAT person's beginning inventory of goods for resale, materials and supplies, including work-in-process and finished goods ( i.e. , based on your example, his said inventory beginning April 1, 1991). This law does not recognize transitory input tax credits pertaining to capital goods beginning inventory. Specifically the said delivery truck in the illustration is embraced by the term "capital goods", which under Section 2 (e) of Rev. Regs. No. 5-87, refers to goods with estimated useful life greater than one year and which are treated as depreciable under Section 29 (f), used directly or indirectly in the production and sale of taxable goods or services". Accordingly, the said delivery truck cannot be legally recognized as transitory input tax credit. Rather, the same may only be charged against operations, for income tax purposes, following the said taxpayer's adopted depreciation accounting method. (supra) The input tax refund of the 10% VAT on capital goods, as provided under Sec. 106 (c), NIRC, is limited only to capital goods purchased/imported, provided, the purchaser/importer is already a VAT person at the time the same is purchased/imported. Hence, the 10% VAT on the purchases of the delivery equipment is not refundable since at the time the same was purchased the subject taxpayer was still a non-VAT person. Besides, as stated earlier, the said 10% VAT on the purchase of the said capital good may not be recognized by the taxpayer as his transitory input tax credit. (Sec. 105, NIRC, supra ) For this reason alone, it follows, it may not also generate any refundable input tax, and, this is true notwithstanding the fact that the said 10% VAT amount has not yet been fully recovered through depreciation expense deductible as of the transition date, i.e. , as of April 1, 1991. QUESTION: (b) Assume that his sales was already registerable after one month of commencing business operation and he failed to register as a VAT person. Upon discovery of a BIR examiner, the taxpayer registered for VAT purposes on January 1, 1990. What is the effective date of his registration? Can the taxpayer still file a claim for refund on the input tax he paid to acquire the truck? If yes, when shall be the start of the counting of the expiration period of 180 days? Until when can he file a claim for refund? When shall be the start of the counting of the taxpayer prescription period within which the taxpayer can file a claim for refund? ANSWER: (b) Under Section 18 (b) of Revenue Regulation No. 5-87, a non-VAT person subject to percentage tax of 2% loses his non-VAT status if his gross sales or receipts in any 12-month period shall exceed P200,000.00, in which case, "he shall register ( i.e. , as a VAT person) within 30 days after the end of that 12-month period with the Revenue District Officer who has jurisdiction over his principal place of business. He shall become liable to value-added tax on the first day of the month following the close of the 30-day period within which he has to register." In short, he shall become liable to VAT on the first day of the month following the close of the said 30-day period. Whether or not he shall, in fact, register as a VAT-person. DHIETc Thus, assuming that after one month of the 12-month period, he exceeded the ceiling of P200,000.00 gross sales or receipts then, within 30-days after the end of that 12-month period, he must register as a VAT-person. On the first day of the month following the close of that 30-day period of registration, he shall become liable to 10% VAT, whether or not he, in fact, registered as a VAT person. If he continues paying only the 2% rather than the 10% VAT, he shall be liable for a deficiency 10% VAT. However, in determining his deficiency VAT liability, the 2% tax payments made for the same taxable period shall be credited against the 10% VAT due, following the doctrine enunciated by the Supreme Court in the case, SINFOROSA ALCA VS. CTA, G.R. NO. L-24624, November 27, 1968. In the said case doctrine, Alca was a manufacturer of "denatured alcohol". Alca erroneously believed that her sales of denatured alcohol was subject to specific tax, which, she continuously paid. Upon audit investigation, however, the BIR contended that denatured alcohol was not subject to specific tax but rather subject to sales tax. She was assessed for deficiency sales tax, but, in the computation of which, she was denied credit of the specific taxes erroneously paid. The Supreme Court sustained that her sales of denatured alcohol was, in law, subject to sales tax instead of the specific taxes she erroneously paid. But, the Supreme Court also held that her erroneous payments of specific taxes on sales of denatured alcohol must be deducted/credited against the sales tax due, in determining the deficiency, notwithstanding that the 2-year prescriptive period for claiming refund/credit of taxes erroneously paid, has already elapsed. QUESTION: (c) If a person pays the 2% tax and is instead assessed by the BIR to pay the VAT, can the examiner automatically deduct the 2% tax payment against the VAT assessment? ANSWER: (c) Following the said case doctrine (which is a doctrine of equitable recoupment the 2% tax (percentage tax) paid by the subject taxpayer (per your illustration) should be credited in the computation of the deficiency VAT liability. QUESTION NO. 3: From January 1 to June 30, 1988 "A" is a non-VAT manufacturer since its annual gross sales did not exceed P200,000.00. From July 1 it became a VAT registered person and as of that date, the following data on inventory that of VAT, were submitted to the BIR. Agricultural food products P308,000 (from a VAT used as raw materials registered seller) VAT taxable goods for use in 206,000 (from a VAT seller) processing Agricultural food products 310,000 (from an exempt seller) used as raw materials REQUIREMENT: Initial Tax Credit for July 1, 1988 ANSWER: This particular situation on transition from a non-VAT to a VAT person is embraced by the transitional input tax credit prescribed in Section 105, NIRC, hence, the subject taxpayer shall be entitled to transitional input tax credits on his beginning inventory, of goods, materials, supplies, including work-in-process and finished goods, the amount of which shall be equivalent to 8% of the value of the said inventory or the actual amount of 10% VAT on the purchase of the said inventory, whichever is higher in amount. (See SEC. 105, NIRC, and SEC. 17 (a), REGS. 5-87, supra ) This provision, however, presupposes that the suppliers of the said goods inventory were liable to 10% VAT on their sales. Thus, if the said suppliers was not liable to pay the VAT on his sales ( e.g. , because his sale transaction is VAT exempt it follows, that no transitional input tax credit may be recognized on the said transitional inventory of goods). IaEHSD Based on the foregoing, the answers to your specific questions are as follows: (i) Agricultural food products, for use as raw materials. In general, all stages of sales of agricultural food products, in their original state, are exempted from 10% VAT, (See SEC. 103 (b), NIRC) provided, the seller is a non-VAT person. This class of seller may, however, opt to register as a VAT person, in which case, his sales shall be subject to 10%. (supra) Since it is represented that the taxpayer's supplier of agricultural products, is a VAT-registered person, it follows that the subject taxpayer is entitled to the transitory input tax credit for his beginning inventory. (ii) Inventory purchased from a VAT-exempt supplier. VAT-exempt beginning inventory cannot generate transitional input tax credit in favor of the transitional VAT person. (iii) Inventory purchased from a VAT person subject to 10% VAT. Since these are goods subject to 10% VAT in the hands of the supplier-VAT person, the transitional VAT person is entitled to transitional input tax credits for this transitional inventory. QUESTION NO. 4: A concrete building was constructed by the company personnel. Can the company claim input tax on the materials purchased to construct the building? ANSWER: When a person construct his own building for use in his business he does not buy a real property but he buys goods and services. Accordingly, the 10% VAT on his purchases of construction materials shall be constituted as input tax credits provided that he uses the building on his VAT registered activity. (See SEC. 104 (a) (i) (D), NIRC and VAT Ruling No. 086-90) QUESTION NO. 5: A building contractor (VAT registered) was engaged to construct the building. Can input tax be claimed by the contractee (VAT registered)? ANSWER: A VAT person is entitled to an input tax credit for the 10% VAT on his purchase of services (See SEC. 104 (a) (2), NIRC); hence, the 10% VAT on the services supplied by a VAT registered building contractor for the construction of his building is constituted as an input tax credit against the output tax of the contractee. QUESTION NO. 6: A building was purchased from a real estate dealer. Can input tax be claimed by the VAT-registered purchaser? QUESTION NO. 7: Is a concrete building considered a capital good if used by a VAT-registered taxpayer in his VAT-taxable business? IcHEaA ANSWERS: The value added tax law applies only on sale of goods or services made in the course of trade or business, or on the importation of goods. (See SEC. 99, NIRC) The term "goods" is limited only to "movable, tangible object which are appropriable or transferable." It includes "capital goods" which under Section 2 (p) and (o) of RR 5-87 refers to "goods" with estimated useful life greater than one year and which are treated as depreciable assets under Section 29 (f), used directly or indirectly in the production or sale of taxable goods or services." This, therefore, means that the term "capital goods" also embrace movable objects but the only difference is that this type of movable object has a useful life greater than one year. On this basis, the term "goods" or "capital goods" do not embrace a real property because this is basically an immovable property; hence not subject to VAT. Accordingly, a VAT person's purchase of a building or real property does not give rise to any input tax credit. Since input tax credits may not be generated from the purchase of immovable objects because the same may not be embraced by the terms "goods" or "capital goods" it follows, that the said purchaser cannot claim for any input tax refund vis-a-vis the purchase of the said building. QUESTION NO. 8: A building contractor made a partial billing amounting to P110,000 for an uncompleted contract. The billing remains unpaid as of December 31, 1987 and the contract was also uncompleted as of that date. A collection was made in the second quarter of 1988. Is the collection subject to output tax? ANSWER: The old contractor's tax law was repealed and was replaced by the VAT law, effective January 1, 1988. In connection with the gross receipts of contractors from their construction projects vis-a-vis the transition of January 1, 1988, the rules for tax determination are as follows: (i) Construction project, completed as of December 31, 1987. Gross receipts from construction projects, completed as of December 31, 1987, remained subject to the 4% contractor's tax even if actual collections are made during the effectivity of the VAT law, subject, however, to the following conditions: (a) The contractor filed an information return about these completed construction projects; (b) the contractor billed his contractees not later than December 31, 1987; (c) the said contractor recorded his billing/receivable in his books of accounts as of December 31, 1987; and (d) the said contractor filed contractor's tax return for his gross receipts therefrom and paid the corresponding contractor's taxes thereon. TaDIHc Failure to comply with the foregoing conditions shall render his 1988 for thereafter; collections/gross receipts from the said completed projects, subject to 10% VAT. (See SEC. 6 (g), REGS. 5-87) (ii) Construction project, uncompleted as of December 31, 1987. Gross receipts from construction projects, uncompleted as of December 31, 1987, shall be subject to 10% VAT. (See VAT RULING NO. 081-90, March 29, 1990. See also VAT RULING, dated June 2, 1988) Very truly yours, (SGD.) JOSE U. ONG Commissioner