VAT Ruling No. 041-01

July 5, 2001 VAT RULING NO. 041-01 Sec. 13 000-00 Philippine Amusement & Gaming Corporation PAGCOR House 1330 Roxas Boulevard Ermita, Metro Manila Attention: Mr . Marcial M . Ocampo, Jr . Managing Head, Accounting Department Gentlemen : This refers to your letter dated June 16, 2000 requesting for a ruling as to whether or not PAGCOR's purchases from its suppliers of goods and services are subject to the 10% VAT, which issue has been adversely affecting your operations and your relationship with your suppliers. You would like, therefore, to request for confirmation of your opinion as follows, viz. : "1. All transactions entered into by PAGCOR as a seller or lessor of goods, services and properties are exempt transactions. It is therefore not liable for both the input and output VAT. "2. Transactions entered into by PAGCOR as a buyer or lessee of goods, services and properties are considered: "a. Exempt transactions under the following conditions: (i) The seller is also a tax-exempt entity; or (ii) The seller is VAT-registered (therefore taxable person/entity) but is engaged in exempt transactions under Sec. 4.103-1(B) of the TaxCode. "b. Taxable transactions (i) If the seller/lessor is VAT-registered (therefore taxable, person/entity) and is engaged in taxable transactions ( i.e. , transactions not enumerated under Sec. 4.103-1 B of the Tax Code). (ii) However, even though these transactions are considered as taxable transactions, the seller can only bill PAGCOR an output VAT equivalent to zero rate (0%) of gross selling price, but it will be allowed to "claim as tax credit or refund the input taxes paid by him on his purchases of goods, services or properties used in producing the goods, services or properties sold or leased to PAGCOR." In reply, please be informed that PAGCOR's tax exemption under Section 13 of its Charter, i.e. , PD No. 1869, provides as follows: "SEC. 13. Exemptions . . . . (1) . . . (2) Income and other taxes . Franchise Holder; No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature, whether national or local, shall be assessed and collected under this franchise , from the corporation; nor shall any form of tax or charge attach in any way to the earnings of the corporation, except a franchise tax of five percent (5%) of the gross revenue or earnings derived by the Corporation from its operation under this franchise . Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected by any municipal, provincial or national government authority." SDHETI Gleaned from the aforequoted provision of your Charter, simply put, PAGCOR is exempt from all kinds of taxes except only for the 5% franchise tax which is in lieu of all kinds of taxes. But while it is true that it is subject only to the franchise tax which is in lieu of all kinds of taxes, this 5% franchise tax had already been replaced by VAT . Section 108 of the Tax Code of 1997 (then Sec. 106 of the Tax Code, as amended) provides that all franchise grantees which are not subject to the franchise tax under Section 119 of the Tax Code shall be considered as " other franchise grantees " subject to the 10% VAT. Let it be stressed that PAGCOR is neither a radio and/or television broadcasting company whose annual gross receipts for the preceding year does not exceed P10,000,000 nor an electric, gas, or water utility company which is subject to the franchise tax imposed under Sec. 119 of the Tax Code. It is for this reason that PAGCOR's sale of goods, properties or services is now subject to the 10% VAT although its Charter subjects it only to the 5% franchise tax. Thus, all transactions entered into by PAGCOR as seller of goods or services or lessor of properties are subject to VAT. On the other hand, as a purchaser of goods and services, the seller can pass on to PAGCOR the VAT component of the cost of goods and services it sells to the public. Pursuant to Sec. 105 of the Tax Code, VAT, being an indirect tax, may be shifted or passed on to the buyer of goods and services. And since VAT is the direct liability of the seller, once shifted, it is no longer a tax on the part of the buyer but an additional cost which the said buyer must pay to obtain the goods or services. Accordingly, PAGCOR, as the buyer of goods, properties or services cannot invoke its tax exemption from all other taxes to avoid payment of the VAT. (VAT Ruling No. 4-96 and 5-96, both dated May 14, 1996). In other words, it is exempt from all other taxes, except the 10% VAT which replaced its 5% franchise tax. Thus, the VAT which is the direct liability of the seller can be passed on or shifted to it as an indirect tax. In view thereof, it is the opinion of this Office that the transactions entered into by PAGCOR as a seller of goods or services or lessor of properties, including the importation of goods, are already subject to VAT effective January 1, 1996, the date of the effectivity of Republic Act No. 7716, PAGCOR being included in the term " other franchise grantees " which are now subject to VAT under Section 108(A) of the Tax Code of 1997. On the other hand, the VAT component of the cost of goods, properties or services sold to PAGCOR may be passed on or shifted by the seller and the same may be claimed by PAGCOR as its input tax pursuant to Section 105, in relation to Section 1 10 of the Tax Code of 1997. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue