VAT Ruling No. 015-04

May 18, 2004 VAT RULING NO. 015-04 R.R. Nos. 7-95 & 12-2003 Aranas Consunji Barleta Unit 106 G/F Metropole Building 326 Tordesillas cor. De La Costa Sts. Salcedo Village, Makati City Gentlemen : This refers to your letter dated July 7, 2003 requesting on behalf of your client, TDK Corporation, Inc. ("TDK"), for confirmation of your opinion that the interest income earned from its one-time lending activity is not subject to value-added tax under Sections 105 and 108 of the Tax Code, as implemented by Revenue Regulations No. 7-95, as amended. It is represented that TDK is a domestic corporation duly organized and existing under the laws of the Philippines primarily to engage in the manufacture of electronic materials and components. It is also a PEZA-registered enterprise located within the Laguna Technopark economic zone. Thus, TDK is entitled to the incentives under Republic Act No. 7916, otherwise known as "The Special Economic Act of 1995." On July 23, 1996, TDK extended a loan to P.T. Properties, Inc. ("PTPI"), a local corporation engaged in the real estate business. The loan is payable at five percent (5%) interest per annum. The loan is merely to assist PTPI overcome its operating funds deficiency, and for no other reason. TDK has not lent money to any other juridical entity other than PTPI, nor does it intend to engage in the business of lending money. With the foregoing, you now seek confirmation of your opinion that interest paid by PTPI to TDK, and which is reported by TDK as part of its regular income, is not subject to VAT as gross receipts of a lending vestor. In reply, please be informed that Revenue Regulations No. 7-95 defined a lending investor as follows, viz : "The term "lending investor" includes all other persons other than banks, non-bank financial intermediaries, finance companies and other financial intermediaries not performing quasi-banking functions who make a practice of lending money or themselves or others at interest." It is clear from the foregoing facts that TDK is not engaged in the practice of lending money. It is organized as a manufacturer of electronic materials and components rather than to engage in lending activities. The lending of money for an interest which is not pursued as a business activity but merely to assist someone in need, will not make the lender a lending investor within the contemplation of Section 108 of the Tax Code. Accordingly, the interest income earned or received by TDK from its loan to PTPI is exempt from the value-added tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be ascertained that the facts are different, then this ruling shall be considered null and void. HcSETI Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group