VAT Ruling No. 061-03

December 15, 2003 VAT RULING NO. 061-03 Sec. 102 (a), R.R. 6-85 341-88 Remco Consulting Developers, Inc. 706 Calicante Street, Ayala Alabang Village Muntinlupa City Attention: Ms. Clinia F. G. Carandang Managing Director Gentlemen : This refers to your letter dated May 15, 2002, and supplementary letter dated June 17, 2002, inquiring about the definition of your revenues as a real estate broker, which shall be used as the basis for value-added tax (VAT) and expanded withholding tax (EWT) both for the taxable year 1995 (the year under audit by BIR Makati East). It is represented that in 1995, Remco Consulting Developers, Inc. (RCDI) was one of the lead real estate brokers of Laguna Properties Holdings, Inc. (LPHI), which then dealt with independent real estate agents and other real estate brokers (hereinafter collectively referred to as the "sales-force") through its lead real estate brokers; that on top of the 5% commission to be given to the sales-force, RCDI likewise received "commission override" at an average of 2%; that now BIR Makati East argues that the VAT liability of RCDI for the taxable year 1995 should be based on gross revenue: commissions for the sales-force, plus the "commission override"; that, as shown by your numeric illustration, if such should be the case, the VAT plus the 5% EWT will wipe out the "commission override", hence, RCDI cannot even cover its operating expenses. In reply, please be informed that under Section 102(a) of the National Internal Revenue Code of 1977, as amended as of January 1, 1995, the 10% VAT on the sale of services such as those of real estate brokers shall be based upon the gross receipts derived from such sale or exchange of services. The term "gross receipts" has been defined therein as 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 advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding VAT. Likewise, under Sec. 1(g) of Revenue Regulations No. 6-85, as amended as of January 1, 1995, gross payments to real estate brokers shall be subject to a creditable withholding income tax of 5%. Therefore, indeed both the afore-stated commissions for the sales-force and the "commission override" received during the taxable year 1995 should have been subjected to the 10% VAT and to the 5% EWT. Moreover, payments of commissions to the sales-force by RCDI should have been subjected to the 5% EWT pursuant to Rev. Regs. 6-85, as amended. Your numeric illustration showing that the VAT plus the 5% EWT wipes out your "commission override" is not accurate. As shown by our numeric illustration below, after deducting the payments to the sales-force, the 5% EWT and the VAT due, what remains out of the 2% "commission override" is still 1.49%, which should be enough to cover the operating expenses of RCDI; this is not to mention that the 5% EWT (effectively 0.32%) should have been creditable against your income tax liability. EASCDH Computation of Net Receipts Gross receipts: Commission override 2.00% Sales-force's commissions 5.00% 7.00% Less: (a) Payments of commissions to the sales-force 5.00% (b) 5% EWT: Gross receipts 7.00% Less: VAT (7.00% 11) 0.64% Gross receipts excluding VAT 6.36% Multiply by rate of EWT 5.00% 0.32% (c) VAT due: Output tax (7.00% 11) 0.64% Less: Input tax* (5.00% 11) 0.45% 0.19% 5.51% Net receipts after VAT and payments to sales-force 1.49% ===== *Assuming all the components of the sales-force are VAT-registered. Finally, it should be noted that pursuant to Republic Act No. 8424, as amended by R.A. 8761, and as further amended by R.A. 9010, for the taxable years from January 1, 2000, up to December 31, 2002, real estate brokers shall, in lieu of the VAT, be liable to a tax equivalent to 7% of their gross receipts from their sale or exchange of services. Moreover, pursuant to Rev. Regs. 6-2001, income payments to real estate brokers that are paid or payable starting September 2001 are already subject to the EWT at an increased rate of 10%. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group