VAT Ruling No. 062-99

July 6, 1999 VAT RULING NO. 062-99 105 242-88 062-99 Maghari Medical Clinic Surallah, South Cotabato Attention: Ms . Marisal Martinez Maghari Gentlemen : This refers to your letter to the FIRST WOMEN'S CREDIT CORPORATION (FWCC) , dated April 29, 1998, copy furnished the Bangko Sentral Ng Pilipinas, Department of Thrift Banks and Non-Bank Financial Institutions. The BSP referred the same to this Office under its covering letter dated June 16, 1998 for our appropriate action. It appears that you have interest-bearing obligation with the FWCC and that its billings for interests includes the 10% value added tax (VAT). Your question is, whether it is legal and proper for the FWCC to include the 10% VAT in its billings for interests on your unpaid loan obligation. In reply, please be informed that Section 105 of the National Internal Revenue Code, as amended by R.A. 7716, and as renumbered by R.A. 8424, provides that, ". . . The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties, or services . . ." This characteristic of the VAT system has been observed since its inception in 1988. Under the Expanded Value-Added Tax Law, promulgated under R.A. 7716, made effective on January 1, 1996 and implemented under Rev. Regs. 7-95, services of, lending investors, banks and non-bank financial intermediaries were included in the coverage of the system. The term lending investors include all persons, other than banks, non-bank financial intermediaries, finance companies and other financial intermediaries not performing quasi-banking functions, who make a practice of lending money for themselves or others at interest. While banks and non-bank financial intermediaries shall be subject to the Value-Added Tax beginning January 1, 2000, lending investors have been covered under the EVAT since 1996 only to the extent of their gross income from their lending activities which includes interests, fees, charges and incidental receipts derived from the lending of money (para. Q-12, RMC 13-96). Receipt of loan principals are not subject to VAT. cdlex In BIR Ruling No. 242-88 dated June 6, 1988, it was held: ". . . the value-added tax is an indirect tax; hence, it can be shifted to the customer. Once shifted to the customer as addition to the cost of goods sold, it is no longer a tax but an additional cost which the customer has to pay in order to obtain the goods (Phil. Acetylene Co. vs. Commissioner of Internal Revenue, G.R. No. L-19707, August 17, 1967). . . ." Therefore, to the VAT-registered purchaser, the VAT passed-on represents input tax creditable against his output tax liabilities. Otherwise, the same would constitute additional cost thereto. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Local & Enforcement Group