VAT Ruling No. 043-99

April 8, 1999 VAT RULING NO. 043-99 Sec. 112 (B) 509-93 043-99 Sycip Gorres Velayo & Co . 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated May 17, 1997 requesting for a ruling as to whether or not your client, Southern Cross Cement Corporation (SCCC) , is entitled to the issuance of a tax credit certificate or refund of the input taxes paid on the services locally purchased from Shimizu Philippine Contractors, Inc. (SPCI) for the construction of its Manila Cement Terminal pursuant to Section 106(b) of the Tax Code, as amended [now Sec. 112(B) of the Tax Code of 1997], as implemented by Section 4.106-1(b) of Revenue Regulations No. 7-95. It is represented that SCCC is a corporation organized and existing under Philippine laws; that it is engaged in the production of cement and registered with the Board of Investments (BOI) on a preferred pioneer status; that it is registered as a value-added taxpayer in accordance with Section 107 of the Tax Code, as amended; that SCCC and SPCI entered into a contract entitled "Manila Cement Terminal Construction Works" on March 1997 for the construction of SCCC's Manila Cement Terminal at the North Harbor Center Industrial Park, Manila; that the cement terminal will be a part of the distribution system for SCCC's cement products; that under the contract, SPCI will perform the following services for SCCC: (a) building and civil works for the land improvements, buildings and concrete-made storage silos, (b) installation and erection of equipment and machineries, and (c) the piping and electrical works; that the contract price paid by SCCC to SPCI for the above services includes the 10% VAT; and that SCCC capitalizes the contract price exclusive of the value-added tax (VAT) as part of its "Property, Plant and Equipment" account, which is a depreciable asset in the books of SCCC. In reply, please be informed that pursuant to Section 106(b) of the Tax Code, as amended [now Sec. 112(B) of the Tax Code of 1997] which provides that: "Sec. 106. Refunds or tax credits of creditable input tax . xxx xxx xxx (b) Capital goods . A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes." llcd and Section 4.106-1(b) of Revenue Regulations No. 7-95, as amended, defines capital goods as follows: "Capital goods or properties refer to goods or properties with estimated useful life greater than one year and which are treated as depreciable assets under Section 29(f), used directly or indirectly in the production or sale of taxable goods or services." Based on the foregoing, the VAT input taxes on the purchase of services by SCCC from SPCI can be claimed as refund or tax credit as the cost of the service purchased forms part of the entire cost of the cement terminal, which is considered capital goods. The capitalization of the cost of the services for the construction of the terminal proceeds from the fact that the said cost is an integral and inseparable part of the entire cost of the terminal. The cost of the said goods and services used for the construction of the cement terminal represents the entire cost of the cement terminal which is a capital property. Thus, the cost of such goods and services is capitalized and recorded, exclusive of the VAT in SCCC's accounting books under the "Property, Plant and Equipment" account, which is a depreciable asset in accordance with Section 29(e) of the Tax Code, as amended [now Sec. 34(f) of the Tax Code of 1997]. While the cost of services as recorded in SCCC's books excludes the VAT, the amount paid by SCCC to SPCI as contract price for the latter's services includes VAT. In other words, the VAT is billed by SPCI to SCCC as part of the price to be paid. Accordingly, the said VAT passed on by SPCI constitutes SCCC's refundable input VAT on capital goods under Section 106(b) of the Tax Code. cdll In view thereof, your opinion that as a VAT registered person, SCCC is entitled to the issuance of a tax credit certificate or refund of the input taxes paid on the goods and services locally purchased from SPCI pursuant to Section 106(b) of the Tax Code, as amended [now Sec. 112(B) of the Tax Code of 1997], as implemented by Section 4.106-1-(b) of Revenue Regulations No. 7-95, is hereby confirmed (BIR Ruling No. 509-93 dated December 23, 1993) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue