VAT Ruling No. 090-99

September 6, 1999 VAT RULING NO. 090-99 109 (x), (z) & 116-018-99-090-99 Wisdom Realty Inc . 28 MRC St., Talipapa Novaliches, Quezon City Attention: Mr . William C . Herrera President Gentlemen : This refers to your letter dated July 29, 1999 requesting for a ruling concerning the tax treatment of your rental income. It is represented that you are currently leasing out twelve (12) commercial and residential units in Quezon City; that your average annual gross receipts amounted to P800,000.00; that out of the units under lease, only four (4) units are for commercial purposes for which you are paying VAT, while the rest are residential units with a monthly rental from P3,000.00 to P7,500.00. In this connection, you would like to confirm whether your residential units are exempt from VAT under Section 109(x) of the Tax Code of 1997 or are subject to percentage tax, under Section 116 of the same Code. In reply, please be informed that Section 109 of the 1997 Wax Code on VAT exempt transactions, provides for the following: "Exempt transactions. The following shall be exempt from VAT: xxx xxx xxx (x) Lease of residential units with a monthly rental per unit not exceeding Eight Thousand Pesos (P8,000), regardless of the amount of aggregate rentals received by the lessor during the year : Provided, that the exemption likewise applies to lease of residential units where the monthly rental per unit exceeds Eight Thousand Pesos but the at aggregate rentals of the lessor during the year do not exceed P550,000; Provided finally, that not later than January 31, 1998, and each calendar year thereafter, the amount of P8,000 shall be adjusted to its present value using the Consumer Price Index (CPI), as published by the National Statistics Office (NSO); xxx xxx xxx "(z) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs , the gross annual sales and/or receipts do not exceed the amount of Five hundred fifty thousand pesos (P550,000): Provided, That . . ." (emphasis supplied ) cdlex Corollary thereto, Section 116 of same Code further provides: "SEC. 116. Tax on Persons Exempt from Value-Added Tax (VAT). Any person whose sales or receipts are exempt under Section 109(z) of this Code from the payment of value-added tax and who is not a VAT-registered person shall pay a tax equivalent to three percent (3%) of his gross quarterly sales or receipts: Provided, That . . ." (emphasis supplied) Section 109(z) of the 1997 Tax Code pertains to transactions which are subject to VAT, but are nevertheless exempt from its imposition because the annual gross sales/receipts derived therefrom do not exceed the P550,000.00 threshold limit. For these transactions which are not subject to VAT because the annual gross sales/receipts do not exceed P550,000, Section 116 of the same Code, imposes a quarterly percentage tax at the rate of three percent (3%) thereon. It is clear in the provision of Section 116 that percentage tax is imposed only on transactions covered by Section 109(z), hence, this excludes from its coverage other VAT-exempt transactions mentioned in Section 109 such as item (x) thereof pertaining to the lease of residential units with monthly rentals not exceeding P8,000 even if the annual gross receipts therefrom exceeds P550,000 for the reason that the same has been explicitly excluded from the scope of Section 109(z) by the insertion of the phrase " other than the transactions mentioned in the preceding paragraphs ". This differs from the lease transaction being described under Section 109(z) on which the percentage tax is imposed. An application of Section 109(z) would be the lease of a 2-unit-residential apartment at P9,000/month per unit. In this particular case, while the transaction is generally considered as one on which VAT is imposed because the rental payment exceeds P8,000, it is nevertheless subject to percentage tax because the gross annual receipts derived therefrom of P216,000 is way below the P550,000 threshold limit. In view thereof, this Office is of the opinion as it hereby holds that the residential units you are leasing with a monthly rental from P3,000.00 to P7,500.00 per unit of the twelve-unit low commercial and residential units are exempt from VAT pursuant to Section 109(x) of the 1997 Tax Code and consequently from the 3% percentage tax imposed under Section 116 of same Code, regardless of whether the annual gross receipts derived therefrom exceed the threshold of P550,000. (Vat Ruling No. 018-99) This ruling is issued on the basis of 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group