VAT Ruling No. 036-00

September 20, 2000 VAT RULING NO. 036-00 Sec. (106) (A) (2) (a) 000-00 Honorable Felipe M . Medalla Secretary of Socio-Economic Planning National Economic and Development Authority NEDA sa Pasig, Amber Avenue Pasig City Dear Secretary Medalla : This refers to your letter dated February 11, 2000, forwarding the request of Asian Management Corporation (AMC), a New York-based real estate international marketer/promoter, for the exemption from the payment of VAT on the sale of Philippine real estate properties to Filipino-Americans or former Filipino nationals. As per letters attached to your endorsement, AMC had launched a massive promotion campaign for the marketing of Philippine real estate properties as an "export investment program" to encourage Filipino-American communities to own vacation/second homes in the Philippines; that the sale of Philippine real estate to Filipino-Americans should be classified as an export activity and a pioneering industry as this would spur national economy; that it is estimated that at least One Billion Eight Hundred Seventy Five Thousand Dollars could be generated in terms of sales based on 1/10% of the 2,500,000 Filipino Nationals living in the U.S. multiplied with an average housing cost of $75,000 x 2,500 vacation houses; that for this reason, the Philippine government should be urged to waive or exempt from payment of VAT the sale transaction for a vacation/second home anywhere in the Philippines by a Filipino-American. In reply, please be advised that this Office shares the view that the sale of Philippine real estate properties to Filipino communities in the U.S.A. would translate into a significant contribution to the generation and remittances of foreign exchange into the country, not to mention the boost such an activity would bring to the domestic real estate market. However, it is the law existing today that " real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business " shall be subject to the 10% value-added tax which is to be " paid by the seller/transferor based on the gross selling price of the property ." (Section 106, Tax Code of 1997) In the case of sale, barter or exchange of real property subject to a VAT, "gross selling price" shall mean the consideration stated in the sales document or the zonal value whichever is higher. (Section 4.100-1, Revenue Regulations No. 7-95) However, " sales of real properties not primarily held for sale to customer or held for lease in the ordinary course of trade or business " and " sales of house and lot and other residential dwellings valued at One Million Pesos and below " are exempt from value-added tax. (Section 109(w), ibid .) ICHcTD The law likewise enumerates export sales subject to 0% VAT and this is found under Section 106(A)(2)(a) of the Tax Code of 1997. It is informed, however, that with the exception of sale of gold to the Bangko Sentral ng Pilipinas (BSP), and those considered export sale under the Omnibus Investment Code of 1987 and other special laws, the term "export sale" generally refers to the " sale and actual shipment of goods from the Philippines to a foreign country ". Regrettably, the concept of "exporting real estate properties" is not yet found in the statute books such that this Office can neither recognize the grant of VAT exemption nor extend zero-rating to real estate sold to Filipino-Americans on such basis. But as it is, we can confirm that real properties classified as capital assets sold by ordinary property owners to Filipino-Americans and house and lot and other residential dwellings valued at One Million Pesos and below are already entitled to VAT exemption. Beyond this, specific legislation would be needed for which Congress, and not this Office, would be the proper authority. We trust that we have addressed your query. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue