VAT Ruling No. 047-02

August 5, 2002 VAT RULING NO. 047-02 Sec. 112 (B) 000-00 Memorandum for: The Regional Director Revenue Region No. 9 San Pablo City SUBJECT : Sumifleland Realty, Inc. (SRI) This refers to your letter, dated August 03, 2001, concerning your request for information on whether SRI is entitled to a refund of alleged input VAT on its purchase of real property from First Philippine Industrial Park, Inc. (FPIP). It is represented that FPIP is a Philippine Economic Zone Authority (PEZA) registered ECOZONE Developer Corporation; that, under Registration Agreement executed by FPIP and PEZA on October 29, 1997, FPIP is entitled to fiscal incentives under Special Economic Zone Act of 1995 (R.A. 7916) and/or the Omnibus Code of 1987 (E.O. 226), that under the Registration Agreement, should FPIP opt to avail the fiscal incentives under E.O. 226, it may not simultaneously avail the incentives on exemption from all national and local taxes (and payment of the 5% special tax rate on gross income under R.A. 7916) and additional deduction for training expenses; that, FPIP opted to avail of the Income Tax Holiday (ITH) granted under E.O. 226, as indicated in its Annual Income Tax Return filed for the fiscal year ended June 30, 1998; that, FPIP is registered as a VAT taxpayer; that, on March 27, 1998, FPIP entered into a contract to sell with SRI, covering a parcel of land located within the ECOZONE, for a consideration of US$553,605.00 (equivalent to 21,3405,612.02); that, while SRI is doing business within the ECOZONE, it is not, however, a PEZA-registered enterprise; that, SRI is a VAT-registered person engaged in real estate business (i.e., "sell, lease, develop, mortgage, and otherwise operate any and all properties, including real estate"); that, on May 19, 1998, FPIP allegedly billed SRI for the 10% value added tax (VAT) on the aforesaid sale, amounting to $55,360.50 (equivalent to P2,188,843.33), which SRI allegedly paid; that, on August 23, 1999, SRI applied for a Tax Credit Certificate of its excess input VAT arising out of the said 10% VAT paid by FPIP and passed on to SRI. In reply, please be informed that: 1. FPIP is exempt from income tax . FPIP, being a PEZA-registered ECOZONE developer, which opted to avail of the fiscal incentives under E.O. 226 is exempt from the payment of income tax, to wit: "TITLE III INCENTIVES TO REGISTERED ENTERPRISES ART. 39. Incentives to Registered Enterprises . All registered enterprises shall be granted the following incentives to the extent engaged in a preferred area of investment: (a) Income Tax Holiday . (1) For six (6) years from commercial operations for pioneer firms and four (4) for non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by the National Government ..." 2. FPIP's sale transaction is subject to 10% VAT . The tax exemption provided under E.O. 226 does not include exemption from other national and local taxes. IcEACH In VAT Ruling No. 037-98, the BIR held that: "In accordance with (DPDI's) PEZA Certificate of Registration and its concomitant Registration Agreement with PEZA, (DPDI) has been granted Income Tax Holiday for a period of four (4) years; ...that during this 4-year Income Tax Holiday, (DPDI) shall only be exempt from income tax. However, (DPDI) shall be subject to other internal revenue taxes provided under the National Internal Revenue Code, such as, but not limited to, value-added tax. Therefore (DPDI's) sales of goods, property and services shall be subject to 10% VAT during the aforesaid 4-year period ." (emphasis supplied) Accordingly, since FPIP is an ECOZONE real estate developer/operator, and that the sale of the subject property to SRI was made during the period FPIP is enjoying Income Tax Holiday, such sale transaction is subject to 10% VAT. SRI, being a VAT registered person, is entitled to the benefit of input tax credit for the aforesaid 10% VAT passed on by FPIP. 3. Input taxes on capital goods . Under Section 112 (B), NIRC of 1997, a VAT-registered person is entitled to a refund of input taxes on capital goods, subject to conditions, as follows: "(B) Capital Goods . A VAT-registered person may apply for the issuance of 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. The application may be only within two (2) years after the close of the taxable quarter when the importation or purchase was made". The above quoted law is implemented by Section 4.106-1 (b) and (c) of Revenue Regulations No. 7-95 as follows: "(b) Capital Goods Only a VAT-registered person may apply for issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased. The refund shall be allowed to the extent that such input taxes have not been applied against output taxes. The application should be made within two (2) years after the close of the taxable quarter when the importation or purchase was made. "Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business. If it is also used in exempt operations; the input tax refundable shall only be ratable portion corresponding to the taxable operations. "'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 Sec. 29(f), used directly or indirectly in the production or sale of taxable goods or services. "(c) Land Only a VAT-registered person may apply for issuance of a credit certificate or refund of input taxes on land purchased to the extent that such input tax has not been applied to output tax .The application should be made within two (2) years after the close of the taxable quarter when the purchase was made. "Refund of input taxes on land shall allowed only to the extent that such land is used in VAT taxable business ." Since the said VAT payment became a valid input VAT in the hands of SRI on May 19, 1998 (or in the 2nd quarter of the year 1998), SRI's statutory right to claim for its refund/credit was due to prescribe after two (2) years, counted from June 30, 1998 (end of 2nd quarter, 1998), or as of June 30, 2000. Since SRI's claim for refund was filed with the BIR on August 23, 1999, or within the 2-year statute of limitation, the same may be given due course on the basis of Section 4.106-1(c), Revenue Regulations No. 7-95, implementing Section 106(b) of the Tax Code of 1977 [Section 112(B) of the Tax Code of 1997], considering that the said real property was acquired by SRI in connection with its VAT taxable business . Any ruling heretofore issued, if inconsistent herewith, is hereby considered revoked, amended, or modified accordingly. This ruling is issued based on the foregoing facts as represented. If, however, after an investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. HEaCcD (SGD.) REN G. BAEZ Commissioner of Internal Revenue