VAT Ruling No. 039-03

September 24, 2003 VAT RULING NO. 039-03 P.D. 1931 000-00 Home Development Mutual Fund (HDMF) 3/F Atrium of Makati Makati Avenue, Makati City Attention: Atty. Romero Federico S. Quimbo, President and Chief Executive Officer Gentlemen : This refers to your letter, dated September 11, 2003, requesting for a confirmation of your opinion that the HDMF is allegedly exempt from the Value-Added Tax (VAT), hence, its gross receipts from interests and fees on loans granted are exempt from the 10% VAT. It is represented that the HDMF was organized pursuant to Presidential Decree (P.D.) No. 1530, Promulgated June 11, 1978, for the following purposes: "WHEREAS, a prime concern of the New Society is the quality of human life, which cannot be improved without providing the citizens with sufficient human shelters and structures; "WHEREAS, the Constitution of the Philippines, in its Article II, Section 7, mandates that: 'The State shall establish, maintain, and ensure adequate social services in the field of . . . housing . . . to guarantee the enjoyment by the people of a decent standard of living;' "WHEREAS, the government has concentrated its efforts in establishing decent human settlements and in uplifting the conditions in our communities; "WHEREAS, up to this time there exist an acute housing shortage which has remained a persistent problem due to the burgeoning population, the absence of adequate house financing, and increasing construction costs, which place satisfactory housing beyond the reach of the masses; "WHEREAS, there is an urgent need to provide massive financing to help solve the housing problem that impedes national development; and "WHEREAS, the difficulties in house financing may be greatly alleviated by establishing a system of voluntary contributions from government and private employees." That, the HDMF has been granted tax exemption under Executive Order No. 538, promulgated June 4, 1979, as follows: "In recognition of housing as a priority concern of the Government, notwithstanding any provisions of existing law, decree, executive or administrative order, rule or regulation to the contrary, the Fund, . . . shall be exempt from the payment of any and all forms of taxes, tariffs, and duties, fees, imposts and assessments, and other charges , . . . 1 That, P.D. No. 1752, promulgated December 14, 1980, which merged the two Funds under P.D. No. 1530 into one, designated the Fund as a separate institution to administer the pool of savings of both public and private employees, and re-emphasized the public purpose behind the creation of the Fund, to wit: "WHEREAS, the Government, in pursuit of the Constitutional mandates on the promotion of public welfare through ample social services, as well as its humanist commitment to the interests of the working groups, in relation particularly to their need for decent shelter, has established the Home Development Mutual Fund, under Presidential Decree No. 1530, a system of employee-employer contributions for housing purposes; and "WHEREAS, there is need to strengthen the Home Development Mutual Fund and make it more effective both as a savings generation and home-building program for the gainfully-employed members of the Philippine society;" That, Letter of Instruction (LOI) No. 1525, promulgated February 6, 1986, recognized the adverse impact on the savings and home-building programs of the Government once the Fund is subjected to tax and duty impositions, to wit: "WHEREAS, the outright withdrawal of the duty and tax exemption privileges of the Fund would cause the dislocation of its financial structure, thus jeopardizing the viability and operations of the savings generation and home-building program of the Government;" That, moreover, R.A. No. 8501, otherwise known as the " Housing Loan Condonation Act of 1998 " also provide: "SEC. 2. Condonation Clause . (a) All unpaid penalties on housing loans from any of the government institutions and agencies involved in the National Shelter Program of the Government, including but not limited to the Government Service Insurance System (GSIS), Social Security System (SSS), Home Development Mutual Fund (Pag-ibig Fund) , National Home Mortgage Finance Corporation (NHMFC), and the National Housing Authority (NHA), are hereby condoned : . . ." "SEC. 3. Amendatory Clause . To ensure the continuity of this Act, the Home Development Mutual Fund (Pag-ibig Fund) which is a major financing. institution of the National Shelter Program is hereby granted the power to condone . . . ." That, in light of the foregoing premises, you believe that the HDMF should be treated VAT exempt "for the following fundamental reasons : "(i) The Fund is not and does not grant housing loans in the 'course of trade or business' because the Fund is not and was not created to engage in trade, business or commerce to begin with; "(ii) The Fund is not engaged in a VAT taxable sale of service as defined under Section 108 of the Tax Code of 1997; "(iii) The Fund, as a recognized major financing institution in the National Shelter Program of the Government, does not qualify as a financing institution subject to VAT pursuant to Section 1 of Republic Act No. 9010 as implemented by Revenue Regulations No. 12-2003; and "(iv) Any tax assessment, fees or charges levied upon the Fund will unnecessarily burden its members and their employers and jeopardize the viability and operations of the savings generation and home-building program of the Government. " In reply, please be informed as follows: = HDMF's tax exemption under P.D. No. 1530, as amended by E.O. No. 538 and P.D. No. 1752, was repealed by P.D. No. 1931, effective June 11, 1984, as follows: "SEC. 1. The provisions of special or general law to the contrary notwithstanding, all exemptions from the payment of duties, taxes, fees, imposts and other charges heretofore granted in favor of government-owned or controlled corporations including their subsidiaries, are hereby withdrawn ." = While HDMF's tax exemption, withdrawn by P.D. No. 1931, was however, restored by LOI No. 1525, promulgated February 6, 1986, said tax exemption was, again withdrawn by E.O. No. 93, promulgated December 17, 1986, as follows: "WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and October 14, 1984, respectively, withdrew the tax and duty exemption privileges, including the preferential tax treatment of government and private entities with certain exceptions, in order that the requirements of national economic development, in terms of fiscal and other resources, may be met more adequately; "WHEREAS, both issuances provided for a review by the Fiscal Incentives Review Board (FIRB) of petitions initiated by affected entities for restoration of withdrawn tax and duty exemption privileges either on a total or partial basis; "WHEREAS, a number of affected entities, government and private were able to get back their tax and duty exemption privileges through the review mechanism implemented by the Fiscal Incentives Review Board (FIRB); "WHEREAS, in addition to those whose tax and duty exemption privileges were restored by the Fiscal Incentives Review Board (FIRB), a number of affected entities, government and private, had their tax and duty exemption privileges restored granted by Presidential action without benefit of review by the Fiscal Incentives Review Board (FIRB); "WHEREAS, the continued enjoyment of these tax and duty exemption privileges has resulted in serious tax base erosion and considerable distortions in the tax treatment of similarly situated entities; "WHEREAS, these privileges have become convenient opportunities for tax manipulation or avoidance, especially in case of interrelated entities; "WHEREAS, the availability of such privileges makes more difficult the attainment of the overall program for national economic development, considering government's fiscal exigencies; "WHEREAS, private entities whose tax and duty exemption privileges are to be withdrawn may still remain competitive by improving on their operational specialty and competence, rather than by relying on fiscal incentives which create distortions in the overall pricing and market systems; "WHEREAS, assistance to government and private entities may be better provided where necessary by explicit subsidy and budgetary support rather than tax and duty exemption privileges if only to improve the fiscal monitoring aspects of government operations ; "NOW, THEREFORE, I, CORAZON C. AQUINO, President of the Philippines, do hereby order: "SEC. 1. The provisions of any general or special law to the contrary notwithstanding, all tax and duty incentives granted to government and private entities are hereby withdrawn , except: "a) those covered by the non-impairment clause of the Constitution; "b) those conferred by effective international agreements to which the Government of the Republic of the Philippines is a signatory; "c) those enjoyed by enterprises registered with: "(i) the Board of Investments pursuant to Presidential Decree No. 1789, as amended; "(ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66, as amended; "(iii) the Philippine Veterans Investment Development Corporation Industrial Authority pursuant to Presidential Decree No. 538, as amended; "d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instruction No. 1416; "e) those conferred under the four basic codes namely: "(i) the Tariff and Customs Code, as amended; "(ii) the National Internal Revenue Code, as amended; "(iii) the Local Tax Code, as amended; "(iv) the Real Property Tax Code, as amended; "f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board." = Consequently, HDMF, was not a tax-exempt government entity at the time the VAT law was promulgated under E.O. No. 273, effective January 1, 1988. The only reason why HDMF was not subjected to the VAT effective January 1, 1988 was, because HDMF qualified as a " Finance Company ," hence, VAT-exempt pursuant to Section 103(j), but instead, subject to the percentage tax pursuant to Section 120, both under the old NIRC of 1977. = Section 102, National Internal Revenue Code (NIRC) of 1977, as amended by R.A. No. 7716 (known as the Expanded VAT Law), imposed the VAT on financial institutions, including " Finance Companies ." However, the effectivity of the VAT on these financial institutions was deferred for several times, as follows: SEHACI 1st, Under Section 17(b), R.A. No. 7716, as follows: "SEC. 17. Effectivity of the Imposition of VAT on Certain Goods, Properties and Services . The value-added tax shall be levied assessed and collected on the following, two (2) years after the effectivity of this Act : "(a) . . . "(b) Services rendered by banks, non-bank financial intermediaries, finance companies and other financial intermediaries not performing quasi-banking functions; "xxx xxx xxx." 2nd, under Section 11, R.A. No. 8241, as follows: "SEC. 11. Section 17 of Republic Act No. 7716 is hereby amended to read as follows: 'Sec. 17. Effectivity of the Imposition of VAT on Certain Goods, Properties and Services . The value-added tax shall be levied, assessed and collected on the following transactions, starting January 1, 1998 : '(a) Services performed in the exercise of profession or calling subject to the professional tax under the Local Government Code of Republic Act No. 7160, and professional services performed by registered general professional partnerships; actors, actresses, talents, singers and emcees; radio and television broadcasters, choreographers; musical, radio, movie, television and stage directors; and professional athletes; '(b) Services rendered by banks, non-bank financial intermediaries, finance companies and other financial intermediaries, not performing quasi-banking functions; and 'xxx xxx xxx.'" 3rd, under Section 5, R.A. No. 8424, as follows: "SEC. 5. Transitory Provisions . Deferment of the Effectivity of the Imposition of VAT on Certain Services . The effectivity of the imposition of the value-added tax on services as prescribed in Section 17(a) and (b) 2 of Republic Act No. 7716, as amended by Republic Act No. 8241, is hereby further deferred until December 31, 1999, unless Congress deems otherwise: Provided , That the said services shall continue to pay the applicable tax prescribed under the present provisions of the National Internal Revenue Code, as amended." "SEC. 1. Section 5 of Republic Act No. 8424 is hereby amended to read as follows: 'SEC. 5. Transitory Provisions . Effectivity of the Imposition of VAT on Certain Services . The imposition of the value-added tax on the following services shall take effect on January 1, 2001: '(a) Services performed in the exercise of profession or calling subject to the professional tax as provided for under Republic Act No. 7160, otherwise known as the Local Government Code of 1991, and professional services performed by registered general professional partnerships; actors, actresses, talents, singers and emcees; radio and television broadcasters, choreographers; musical, radio, movie, television and stage directors; and professional athletes; '(b) Services rendered by banks, non-bank financial intermediaries, finance companies , and other financial intermediaries not performing quasi-banking function; and 'xxx xxx xxx.'" 4th, under Section 1, R.A. No. 9010, as follows: "SEC. 1. Section 5 of Republic Act No. 8424, as amended by Republic Act No. 8761, is hereby further amended to read as follows: 'SEC. 5. Transitory Provisions . Effectivity of the Imposition of VAT on Certain Services . The imposition of the value-added tax on the following services shall take effect on January 1, 2003: '(a) Services performed in the exercise of profession or calling subject to the professional tax as provided for under Republic Act No. 7160, otherwise known as the Local Government Code of 1991, and professional services performed by registered general professional partnerships; actors, actresses, talents, singers and emcees; radio and television broadcasters, choreographers; musical, radio, movie, television and stage directors; and professional athletes; '(b) Services rendered by banks, nonbank financial intermediaries, finance companies and other financial intermediaries not performing quasi-banking functions; and 'xxx xxx xxx.'" Thus, the HDMF, as a government a Government Finance Company, became liable to the 10% VAT, effective January 1, 2003, pursuant to R.A. No. 9010, as implemented by Revenue Regulations No. 12-2003, pursuant to Section 2.7, Revenue Regulations No. 12-2003, reading: "2.7 Financing Companies shall refer to corporations except banks, investments houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivables, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable properties ( R.A. No. 5980 as amended by R.A. No. 8556 )." That the HDMF is liable to the old Finance Company tax is now a forgone conclusion; in fact, our records show that the HDMF paid its delinquent percentage taxes for the period from 1988 to June 2002, in the amount of P19,715,927.00, under Voluntary Assessment And Abatement Program (VAAP). 3 But, the foregoing, notwithstanding, the HDMF now posits that it should not be made liable to the VAT for the following reasons: "(i) The Fund is not and does not grant housing loans in the 'course of trade or business' because the Fund is not and was not created to engage in trade, business or commerce to begin with; "(ii) The Fund is not engaged in a VAT taxable sale of service as defined under Section 108 of the Tax Code of 1997; "(iii) The Fund, as a recognized major financing institution in the National Shelter Program of the Government, does not qualify as a financing institution subject to VAT pursuant to Section 1 of Republic Act No. 9010 as implemented by Revenue Regulations No. 12-2003; and "(iv) Any tax assessment, fees or charges levied upon the Fund will unnecessarily burden its members and their employers and jeopardize the viability and operations of the savings generation and home-building program of the Government . In reply, please be informed that Section 105, NIRC of 1997, provides as follows: "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 or 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. "The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto , by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. "xxx xxx xxx." Moreover, Section 108 of the said Code further provides that financial institutions, including Finance Companies, shall be treated engaged in the sale or exchange of services , hence, subject to 10% VAT, as follows: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . "(A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. "xxx xxx xxx "The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by . . . dealers in securities; lending investors ; . . . services of banks, non-bank financial intermediaries and finance companies ; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include: 'xxx xxx xxx.'" It follows, the HDMF's money lending activities, being a " commercial or an economic activity ," is embraced under the phrase " in the course of trade or business ." In fine, it is subject to VAT. HDMF's money lending activities is rendering of service to its members/borrowers. In the case of COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION 4 ( i.e. , the COMASERCO case doctrine), the Supreme Court held that " As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT ." "COMASERCO contends that the term 'in the course of trade or business' requires that the 'business' is carried on with a view to profit or livelihood. It avers that the activities of the entity must be profit-oriented. COMASERCO submits that it is not motivated by profit, as defined by its primary purpose in the articles of incorporation, stating that it is operating 'only on reimbursement-of-cost basis, without any profit.' Private respondent argues that profit motive is material in ascertaining who to tax for purposes of determining liability for VAT . " We disagree . "xxx xxx xxx "The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members of their guests), or government entity . " xxx xxx xxx . "The definition of the term 'in the course of trade or business' incorporated in the present law applies to all transactions even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters or exchanges goods and services, was already liable to pay VAT. The present law merely stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and services . " xxx xxx xxx . "Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT ." In view of the foregoing, please be informed that your aforesaid request cannot be granted for lack of legal basis. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue Footnotes 1. Paragraph 5 of E.O. No. 538. 2. Financial institutions, including Finance Company. 3. Revenue Regulations No. 12-2002, as amended. 4. COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION, respondents. [G.R. No. 125355. March 30, 2000.]