VAT Ruling No. 062-03

December 15, 2003 VAT RULING NO. 062-03 Section 105 VAT Ruling No. 072-2001 Reedley International School JNCV Building, Pasig Boulevard, corner Rosemarie Lane, Pasig City' Attention: Mr. Ferdinand P. Ong President Gentlemen : This refers to your letter dated May 5, 2003 requesting for a clarification regarding the VAT being charged by the owner of the building you are presently renting and whether or not you can deduct the VAT payments already made on future rentals. It is represented that REEDLEY INTERNATIONAL SCHOOL is a non-stock, non-profit educational institution whose exemption from taxes and duties on all its revenues and assets actually, directly and exclusively for educational purposes was confirmed by BIR Ruling No. ENPS-028-2000 dated September 20, 2000; that you are duly registered with the Securities and Exchange Commission under SEC Registration No. A1999-18777 dated February 3, 2000; that the incorporators are all Filipinos residing in the Philippines; that you and your lessor signed a lease contract prior to BIR Ruling No. ENPS-028-2000 dated September 20, 2000; and that you are recognized with the Department of Education, Culture and Sports under Government Recognition No. S-006, series of 2000. In reply, please be informed as follows: 1. The 10% VAT is an indirect tax and the amount may be shifted or passed on to the buyer, transferee or lessee of the goods, properties and services. (Sec. 105, NIRC of 1997) Since there is no showing that REEDLEY INTERNATIONAL SCHOOL is exempt from indirect tax under any existing law, your purchases of goods, properties or services from VAT-registered entities are subject to 10% VAT, which amount of tax may be passed on to you and shall form part of the invoice price thereof. ETDAaC 2. Section 34(A)(2) of the 1997 Tax Code provides for the expenses allowable to private educational institutions, which includes rental expense, being an ordinary business expense. However, prepayment of future rentals is a prepaid expense which is an asset account. Only the amount which corresponds to the taxable year should be deductible as ordinary business expense. Regrettably, based on the foregoing, your opinion as to whether you can deduct the VAT payments already made on future rentals is denied for lack of legal basis. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group