VAT Ruling No. 015-03

January 21, 2003 VAT RULING NO. 015-03 Sec. 105, NIRC of 1997 040-91 Equinox Management Services Corporation Unit B, #5 Aguilar Street SFDM, Quezon City Attention: Roberto B. Lopez President Gentlemen : This refers to your letters dated March 26, 2002 and May 30, 2002, requesting a ruling on the value-added tax (VAT) liability of EQUINOX MANAGEMENT SERVICES CORPORATION (Equinox). It is represented that Equinox is a VAT-registered property management and real estate sales company which renders professional services in the management and administration of condominium projects; that your condominium clients are A&T Condominium, Palace of Makati Condominium, Future Point Plaza Condominium; Hansel Arcade Cubao, Marian Medical Arts Condominium, Garden View Tower Condominium; that these condominium clients refuse or decline to pay the 10% VAT for the following reasons: 1. They are non-profit entities and do not earn any income from their operation, and their sole source of revenue are membership dues/assessments; 2. They are registered with the Bureau of Internal Revenue as non-VAT entities since they are not engaged in the sale of goods or services; and 3. If they pay the passed on 10% VAT, they cannot recover the same as input tax. Based on the foregoing, you posed the following questions: "If our condominium clients refuse to pay (the passed-on) 10% VAT on the grounds that they are VAT Exempt, how then can we pass on these buyers of our services, the amount of value added tax we are required to pay? Is it not iniquitous if our company will assume that burden all by ourselves?" In reply, please be informed that Section 105 of the National Internal Revenue Code (Tax Code) of 1997: "SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges; leases goods or properties; renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. " The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties of services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. (Emphasis supplied) "xxx xxx xxx" The foregoing provision declares that the VAT is "an indirect tax" (as distinguished from a direct tax) and that it "may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services." DIETcH Direct taxes are those that are demanded from the very person who, it is intended or desired, should pay them; while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. (Commissioner of Internal Revenue vs. John Gotamco & Sons, Inc., 148 SCRA 36 [1987]; Commissioner of Internal Revenue vs. Tours Specialists, Inc., et al., 183 SCRA 402 [1990]) When a VAT-registered seller of goods, properties or services passes on the VAT, such seller is merely shifting the tax burden (not the liability to pay it) to the purchaser as part of the cost of the goods sold or services rendered. Being an indirect tax, it may very well be expected that the additional burden will ultimately be passed on the buying public or consumers in the unpopular price increase (Carlsberg Phils., Inc. vs. Commissioner of Internal Revenue, CTA Case No. 4712, July 5, 1993) . However, despite his right to shift, the seller may elect to absorb the tax himself (Maceda vs. Macaraig, Jr., etc., et al., G.R. No. 88291, May 31, 1991) . Thus, should the VAT-registered seller decides to shift the burden of the VAT, it may legally do so, even when the purchaser is exempt from the VAT under Section 109 of the Tax Code of 1997, because such exemption applies only to the VAT to which it is directly liable and does not apply to which are being passed on to it by its suppliers. Consequently, as regards the purchases of services of the condominium clients of Equinox, the VAT thereon to be paid by Equinox may be passed on to its condominium clients and ultimately be considered as added cost of the services procured for the VAT at this stage is merely an indirect tax. (VAT Ruling No. 040-91 dated May 29, 1991) . cSaATC This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the parties herein are concerned. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group