VAT Ruling No. 051-91

May 29, 1991 VAT RULING NO. 051-91 Mr. Roland Young Chairman Committee on Leasing Philippine Association of Finance Companies 3rd Floor, Dolmar Gold Tower Building Alvarado Street, Legaspi Village Makati, Metro Manila S i r : This refers to your letter dated March 2, 1988 requesting a confirmation that a sale of capital equipment by a person to a finance company in a sale-and-leaseback transaction is not subject to VAT. As represented, the sale occurs because a company or individual (the "Company") wants to acquire certain equipment (the "Equipment") from a manufacturer and needs funds for the purpose. To finance the purchase, the Company procures the necessary funds from a financing company (the "Financing Company") and enters into the following transaction (the "Transaction"): 1. The Company purchases the Equipment from the manufacturer and a deed of sale is executed for this purpose. 2. To finance its purchase of the Equipment, the Company turns around and sells the Equipment to the Financing Company and utilizes the purchase price [paid by the Financing Company to it (the Company)] to pay for the Company's own purchase of the Equipment from the manufacturer. The Financing Company involved is registered under the Financing Company Act (Republic Act. No. 5980). 3. In order to legally possess and use the Equipment, the Company, as lessee enters into a leaseback arrangement with the Financing Company, as lessor. The lease qualifies as a Finance lease under Revenue Regulations No. 19-86. 4. During the term of the lease, the Company pays lease rentals which cover principal and interest payments on the financing extended by the Financing Company. In reply, please be informed that the said transaction partakes the nature of a sale of a personal property from the company/borrower to the financing company, hence it is subject to 10% VAT [Section 100(a) of the Tax Code, as amended]. On the other hand, if the equipment is immobilized by incorporation to an immovable structure at the time of sale. [Article 415(3) of The New Civil Code] or by destination in premises where it is used to meet the needs of the industry or works therein carried on [Article 415(5) of The New Civil Code], the sale thereof by the company/borrower is exempt from VAT pursuant to Section 2(p) of Revenue Regulations No. 5-87 which defines goods for VAT purposes as "any movable, tangible objects which is appropriable or transferable". On the part of the financing company, its leaseback transaction is not subject to VAT but to the 5% gross receipts tax since it is treated as part of its gross income under Title V of the Tax Code, as amended. Besides, the lease rentals during the term of the lease, cover principal and interest payments of the credit extended by the financing company. Such being the case, the VAT for the sale of equipment, if taxable, passed on by the lessee/borrower shall be recorded by the financing company as part of its expense/cost. aisadc Very truly yours, JOSE U. ONG Commissioner of Internal Revenue