VAT Ruling No. 094-02

December 23, 2002 VAT RULING NO. 094-02 Secs. 108, 114 (C), 116, NIRC 060-98 The Law Firm of Zamora Mendoza and Associates Units 301-304, Asuncion Complex 2742 Zenaida Street J.P. Rizal, Makati City Attention: Atty. Anthony T. Zamora and Atty. Madeline B. Mendoza Gentlemen : This refers to your letter dated May 02, 2001 requesting for opinion on whether the business operation of your client, LGU Guarantee Corporation (LGUGC), is subject to the 10% value-added tax (VAT) and not to the percentage tax. It is represented that LGUGC is a corporation registered with the Securities and Exchange Commission (SEC); that under its Articles of Incorporation its primary business purpose is: "To guarantee loans and other forms of credit accommodations granted to local government units in the Philippines and other entities by financial institutions duly accredited with the said corporation, as well as capital market instruments issued by local government units and other entities, all in accordance with the laws and regulations of the Philippines." (emphasis supplied) that LGUGC, believing that it is exempt from VAT, did not register as a VAT-taxpayer; that LGUGC does not extend commercial credit to an entity but only guarantees the obligation of local government units (LGUs) from which it earns guarantee fees. In reply, please be advised that under Section 105 of the National Internal Revenue Code (NIRC) of 1997, "any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the Code." The sale of service is defined under Section 108 of the NIRC, which reads as follows: SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase 'sale or exchange of services' means the performance of all kinds or services in the Philippines for others for a fee, remuneration or consideration , including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire another domestic common carriers by land, air and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; services of banks, non-bank financial intermediaries and finance companies; and non-life indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan secret formula or process, goodwill, trademark, trade brand or other like property or right; insurance companies (except their crop insurances), including surety, fidelity, (2) The lease of the use of, or the right to use of any industrial, commercial or scientific equipment; (3) The supply of scientific, technical, industrial or commercial knowledge or information; (4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge or information as is mentioned in subparagraph (3); (5) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person. (6) The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; (7) The lease of motion picture films, films, tapes and discs; and Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. 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) From the foregoing, the act of extending a guarantee on an obligation for a fee qualifies as a sale of service subject to 10% VAT and not to percentage tax imposed on banks, non-bank financial intermediaries and financing companies as provided in Sections 121 and 122 of the NIRC, respectively. Consequently, LGUGC should register as a VAT taxpayer. Moreover, under Section 114(c) of the NIRC, LGUs, being political subdivisions, are required to deduct and withhold the VAT due at the rate of six percent (6%) on the gross receipts for services rendered by LGUGC, which shall be creditable against its VAT liability (BIR Ruling No. 060-98 dated May 21, 1998, BIR Ruling 132-96 dated November 27, 1996; BIR Ruling No. 70-96 dated July 5, 1996). Please note, however, that the guarantee fees received by LGUGC, prior to its VAT registration, are already subject to 10% VAT if its gross annual receipts exceeded the five hundred fifty thousand peso (P550,000.00) threshold set forth in Section 109(z) of the NIRC. Otherwise, it shall be subject to tax equivalent to three percent (3%) of its gross quarterly receipts as provided under Section 116 of the NIRC. For failure to pay the VAT during the prescribed period, LGUGC shall, in addition to the basic VAT deficiency, be liable to 25% surcharge, 20% interest per annum and compromise penalty. This ruling is being 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group