Bir Ruling Jul 18

BIR RULING NO. 098-97 Tax Consequences of Pre-Termination of Lease and Cancellation of Option to Purchase Priscilla B. Valer, Edmundo P. Guevara and Amado R. Santiago III wrote a letter to the BIR to ask for a tax opinion on the tax consequences of the pre-termination of the lease and cancellation of option to purchase affecting your client, Read Rite Philippines, Inc. (Read Rite) 1. Read Rite is a domestic corporation engaged in the manufacturing and export business has an existing long term Lease Contracts with Option to Purchase over two contiguous parcels of land with improvements (Leased Properties) with Philippine American Life Insurance Company (Philamlife), and PERF Realty Corporation (PERF) 2. Philamlife and PERF have a prospective buyer who is willing to buy the Leased Properties free for all liens and encumbrances including Read Rite's existing leasehold rights and option to purchase 3. Philamlife and PERF, and Read Rite are prepared to enter into an agreement wherein Read Rite will consent and agree to the pre-termination of the Lease Contracts and cancel the options to purchase stipulated therein for a certain consideration; that the amount of the consideration to be mutually agreed upon by Read Rite and Philamlife and PERF represents the pre-termination penalty, price for the cancellation of the options to purchase and indemnity for the resulting disturbance or damage arising from the lease pre-termination; that the amount of such consideration will be higher than the original cost basis of the Leased Properties; and that when the Leased Properties are released from Read Rite's leasehold rights and options to purchase, Philamlife and PERF will sell the Leased Properties to the buyer. With regards to the VAT issue, If Said consideration is not subject to the 10% value added tax (VAT) since there is no sale, barter or exchange of goods or and properties in the ordinary course of trade or business. Bir Ruling: With regard to the value added tax, Section 99 of the Tax Code provides: "Sec. 99. Persons Liable. — Any person who, in the ordinary course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be liable to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code. Moreover, in BIR Ruling No. 31-83 dated March 1, 198, this Office has ruled that an option to buy, in the hands of a taxpayer who does not deal in options, is a capital asset and the sale thereof gives rise to a capital gain. Since Read Rite does not deal in leasehold rights and options in its ordinary course of trade or business, the pre-termination of the leases and cancellation of the options to purchase will not be made in the ordinary course of trade or business of Read Rite. Hence, your opinion that the pre-termination of the lease and the cancellation of the options to purchase is not subject to VAT is hereby confirmed.

VAT Ruling No. 444-88 Mr. Leon J. Panlilio wrote a letter stating that he is planning to establish a company consumer store where basic commodities shall be sold at cost and that the projected sales per year shall be approximately P2.5 million. Panlilio wants to know whether the sales can be zero-rated considering that as a seller at cost, there would be no value-added to the goods. VAT Ruling: Panlilio’s proposed sale transactions cannot qualify for zero rating since they do not meet the conditions set under Section 100(a) of the Tax Code as amended by E.O. 273. Instead, his activity, in spite of the absence of profit and value-added to the goods, can be classified as one to be undertaken by persons liable to VAT under Section 99 of the Tax Code as amended, to wit: "Any person, who in the course of trade or business sells, barters or exchanges goods, renders services or engaged in similar transactions and any person who imports good shall be subject to value-added tax" Moreover, the projected sales of P2.5 million is a strong basis for subjecting your sales transactions to VAT. VAT Ruling No. 207-90 Atty. Jose Lis C . Leagogo wrote a letter to the CIR requesting for a reconsideration of our VAT RULING NO. 087-90, holding that his client, RCA GLOBAL COMMUNICATIONS, INC. (PHIL. BRANCH), is subject to 10% value added tax vis-a-vis its sale of technical services to Philippine Global Communication (PHILCOM). It is being contended that the value added tax may be levied provided the sale of service is made in the course of business; that, your client's sale of technical services is made only to one person, i.e., sale to Philcom; that, since the same is only one and isolated transaction, the same may not be constituted a sale made in the course of business; Section 2(j) of the VAT Revenue Regulations No. 5-87 defines "sale of service" as the performance of all kinds of services for others for a fee, which means, to be taxable as a business act, services must be made to more than one person since the word "others" pertains to several persons/contractees rather than to only one person. Section 99, NIRC, provides: "Any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engaged in similar transactions . . . shall be subject to value added tax (VAT) imposed in Sections 100 and 102 of this Code."

Whether or not a person is engaged in business is determined by his intent for doing an act or series of acts. An initial or single act may be constituted done in the course of business if the same is done with the intent of carrying on a business. VAT Ruling: RCA Global has been engaged in communications business at the time it contracted with PHILCOM. There is no necessity to prove your client's intent in selling technical services to PHILCOM. It is more than apparent your client sold its services while engaging in worldwide communications business. That its transaction with PHILCOM was isolated may not, however, detract from the fact that the same was entered into because it was, as it is presently, its line of business. VAT RULING NO. 010-98 Atty. Serafin U . Salvador wrote a letter requesting confirmation of your opinion that the carriage of goods or cargoes by domestic shipping companies which are members of the Domestic Shipowners Association (DSA) to international carriers is zero-rated for value added tax purposes pursuant to Section 102 of the Tax Code as amended. Domestic carriers are contracted by agents of international carriers engaged exclusively in international shipping for the carriage of goods or cargoes from one point in the Philippines to another. Under the set-up, a shipper arranges with an international carrier for the latter to transport the goods or cargoes from the Philippines to another country; A bill of lading is issued by the international carrier to cover the entire transaction; that to enable the international carrier to carry the goods, sometimes there is a need to carry the goods to the ports in Manila; that the agent of the international carrier would then contract a domestic carrier to transport the goods to the ports in Manila; charges for the transshipment of the goods are for the account of the foreign principals and are paid by the latter through agents in the Philippines; that the agents bill the principals for such services; that the foreign principals remit the payment to the agents who, in turn, pay the domestic carrier tendering the service; that the local agents merely act as a conduit of the foreign principal for whose account the expenses are incurred. Atty. Salvador, cited Section 102(b)(4) of the Tax Code as amended, pertinent provisions of which provide as follows: "SEC. 102. Value-Added Tax on Sales of Services and Use or Lease of Properties. — xxx xxx xxx (b) Transactions subject to zero-rate. — The following services performed in the Philippines by VATregistered persons shall be subject to 0% xxx xxx xxx (4) Services to vessels engaged exclusively in international shipping."

BIR Ruling: In reply, please be informed that the VAT zero-rated services contemplated in the above cited provision refers to services with respect to the international vessel itself such as crewing, repair,

catering, and other similar arrangements. It cannot apply to the carriage of goods and cargoes in domestic routes. VAT RULING NO. 026-97 Atty. P. Clinton L. Laudencia wrote a letter requesting for confirmation of your opinion that charges/billings made by his company (San Miguel Corp.) to its subsidiaries for their use of utilities, common facilities and services purely at cost and without any profit and being merely reimbursements are not subject to the value added tax. Two or more subsidiaries share the same building with the main company, San Miguel Corporation (SMC); that this may be covered by lease agreement with SMC as the only nominal party-lessee; that rentals may be paid by SMC alone to the lessor and then charged the other co-lessees an amount equivalent to the proportionate shares of each lessee and without profit or mark-up; that similarly various expenses such as security, building maintenance, and utilities are first paid by the SMC to the service providers and then bills the subsidiaries actually availing of the services the allocated expenses at cost; that the amount charged are mere reimbursement of the expenses incurred by SMC for and in behalf of the subsidiaries; that no profit is made nor is there any intention on the part of SMC to make profit from the transactions. Furthermore, it is represented that in the above transactions, SMC does not sell, barter, exchange, nor lease any good or property neither does it render any service to the subsidiaries. VAT Ruling: In reply, please be informed that under Section 99 of the Tax Code as amended, which provides for the coverage of the value added tax, only "person who in the course of trade or business, sells, barters, exchanges, leases goods or properties or renders services, and any person who imports goods shall be subject to the value added tax." Accordingly, since SMC does not sell, barter, exchange, nor lease any good or property and neither does it render any service to the subsidiaries, the above transactions are not subject to the value added tax.

Sale of Microwave Backbone Transmission Network, an Isolated Transaction Not Subject to VAT BIR RULING NO. 113-98 Mr. Rene Jose S. Domingo wrote a letter requesting confirmation of his opinion that the sale of a microwave backbone transmission network by Liberty Broadcasting Network, Inc. (Liberty), being an isolated transaction, is not subject to VAT. Liberty, holds a congressional franchise to provide the public with wireless radio communication services and to operate radio communication stations nationwide; they also currently engaged in providing services for public shared repeater communications, radio trunking, and store and forward communications fax business; that you are also operating and maintaining a satellite communications network

The company is wants to raise funds and to achieve this, they intend to sell their microwave backbone transmission network which is comprised of various microwave equipment, cables, antennae, etc., which are located within your company's locations and sites deployed nationwide and the value of which comprises approximately 25% of your fixed assets; BIR Ruling: In reply thereto, the sale of your microwave backbone transmission network to another wireless communications carrier is not in the course of your trade or business of selling telecommunication services. Neither is it incidental thereto since the same does not necessarily follow the primary function of selling telecommunication services. (Magsaysay Lines, Inc. et. al. v. Commissioner of Internal Revenue, CTA Case No. 4353, April 27, 1992) Accordingly, since the sale of the microwave backbone transmission network is just an isolated transaction, said sale is not subject to VAT. (BIR Ruling Nos. 6-97 dated January 17, 1997; 033-97 dated April 1, 1997; 054-96 dated May 14, 1996) Moreover, the subject sale shall not result in any input tax credit to the buyer.

BIR RULING NO. 424-14 Evangeline H. Zarate wrote a letter requesting for confirmation of her opinion on the tax treatment of the transfer of assets and liabilities of Monterey Foods Corporation (MFC) to San Miguel Foods, Inc. (SMFI). We submit the resolution of the following issues pending your submission of the necessary documents relative to the transaction: 1) Whether gain or loss shall be recognized on the transfer of all assets and liabilities by both the transferor and transferee, 2) Whether the unused input VAT of MFC may be transferred for the use or tax credit against the output VAT liabilities of SMFI; 3) Whether the transfer of all assets and liabilities are not subject to donor's tax; 4) Whether the surrender of the shares of stock held by the stockholders of MFC to SMFI in complete redemption and cancellation of the capital stock of MFC is not subject to DST. As regards the request that no (VAT) shall be payable on the transfer of assets, please be informed that Section 105 of the National Internal Revenue Code of 1997, as amended (NIRC) identifies the persons liable for the Value-Added-Tax. Thus, "SECTION 105. Persons Liable. — 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 the value-added-tax (VAT) imposed in Sections 106 to 108 of this Code. xxx xxx xxx." Moreover, Section 109 of the NIRC enumerates those transactions that are exempt from VAT. Nowhere in Section 109 of the NIRC does it state that the transfer of assets to a corporation in exchange for shares of the latter is exempt from VAT. Thus, there is no legal basis to exempt from VAT the transfer of assets of Monterey Foods Corporation to San Miguel Foods, Inc.