VAT Ruling No. 055-99

May 17, 1999 VAT RULING NO. 055-99 108 000-00 055-99 Mr . Francisco B . Escarda Assistant Commissioner Special Audit Office Commission on Audit Commonwealth Avenue, Quezon City S i r : This refers to your letter dated February 23, 1999 requesting for a ruling on whether the billings made by public utility companies (PUC's) which you discovered in your audit were correct so that you will have a basis for your audit recommendation. It is represented that the Currency Exchange Rate Adjustment (CERA) pertaining to foreign loans availed by the PUC is subjected to the 10% Value-Added Tax (VAT) and subsequently billed to the consumers. The billing is done as follows: Regular Monthly Charges P240.00 Calls in Excess of Free Minutes 1,128.00 Foreign Currency Adjustment (CERA) 233.92 Total P1,601.92 Value-Added Tax 160.19 Total Charges Billed to Consumer P1,762.11 Apprised of the above billing, you now pose the query why the CERA has to be subjected to VAT when it is not a proceed from any sale of materials or services but an amount to be paid to foreign financing institutions as a result of increase in the dollar value of the loan contracted by the PUC. In reply, please be informed that the billing presented above is in accord with the rule prescribed under the VAT Law. It must be noted that the PUC is engaged in business as a seller of service taxable under Section 108 of the-Tax Code of 1997. The basis of the tax is the gross receipts which is defined in the aforesaid Section as follows: "The term. ' gross receipts ' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty , including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax." (Emphasis supplied) The determination of how much shall be billed as service fee or compensation for services rendered is the sole discretion of the PUC. It is clear from the billing that the CERA was made as part of the service fee it charges its consumers and therefore, it becomes part of its gross receipts subject to the VAT. The service fee is the income of the PUC and its amount is usually determined by how much costs or expenses it wanted to recover plus a certain margin of profit. The entire amount billed, exclusive of VAT, be it recovery of CERA, salaries, administrative expenses, etc. or profit, constitutes its gross receipts arising from compensation of services rendered which is the very amount that is subject to value-added tax. prcd This ruling is being issued based on 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