June 5, 2009

BIR RULING [DA-(VAT-050) 282-09]

110; 112; BIR Ruling No. 415-93

P.L. Roldan Accounting Office

Unit 2806 Jollibee Plaza Condominium
F. Ortigas, Jr. Road
Ortigas Center, Pasig City

Attention: Mr. Pedro Q. Roldan, Sr.

Gentlemen :

This refers to your letter dated October 23, 2008 requesting, in behalf of your
client, Maple Resources Development Corporation, a company engaged in the business
of wood processing, lumbering & wood-working, for a ruling on the following:
1. Were the capital assets and company's non-trade inventories taken by
creditors subject to value-added tax (Output tax)?
2. Could the Company offset the accumulated input taxes against its
obligation to the Government (Bureau of Internal Revenue)?
3. Could the company ask for refund of the excess input taxes after applying
the latter against its obligations?
It is represented that the Company imported its raw materials from foreign
countries and paid the value-added tax (input taxes) to the appropriate district of the
Bureau of Internal Revenue, though the sellers were foreigners and not covered by the
Laws of the Philippine government; that the Company has accumulated input taxes, but
unfortunately, the Company stopped its operation two (2) years ago due to unfavorable
economic conditions in our country, lack of raw materials and high exchange rate; that
the Company was left with no income thus, cannot pay anymore its payables to its
creditors; and that the Company's capital assets and defective company's non-trade
inventories were taken by creditors.
In reply, please be informed as follows:
Section 106 (B) of the Tax Code of 1997 provides viz.:
"SEC 106. Value-Added Tax on Sale of Goods or Properties. —

xxx xxx xxx

(B) Transactions Deemed Sale. — the following transactions shall be deemed
sale:

(2) Distribution or transfer to:

(a) Shareholders or investors as share in the profits

of the VAT-registered persons; or

(b) Creditors in payment of debt.

CD Technologies Asia, Inc. © 2018 cdasiaonline.com
 xxx xxx xxx

Likewise, Sec. 4.106-7 (a) (2) of Revenue Regulations No. 16-2005 provides, viz.:
"Sec. 4.106-7. Transactions Deemed Sale. —
(a) The following transactions shall be "deemed sale" pursuant to Sec. 106(B) of
the Tax Code:

xxx xxx xxx

(2) Distribution or transfer to:

i. Shareholders or investors share in the pro ts of VAT-registered
person:

Property dividends which constitute stocks in trade or properties

primarily held for sale or lease declared out of retained earnings
on or after January 1, 1996 and distributed by the company to its
shareholders shall be subject to VAT based on the zonal value or
fair market value at the time of distribution, whichever its
applicable. aIAHcE

ii. Creditors in payment of debt or obligation."

xxx xxx xxx

For transactions deemed sale, the output tax shall be based on the market value
of the goods deemed sold as of the time of the occurrence of the transactions
enumerated in Sec. 4.106-7(a)(1), (2), and (3) of the these Regulations. However,
in the case of retirement or cessation of business, the tax base shall be the
acquisition cost or the current market price of the goods or properties, whichever
is lower."

Thus, the taking of the capital assets and company's non-trade inventories by the
creditors of Maple Resources Development Corporation are subject to value-added tax
at the rate of 12% based on the acquisition cost or the current market price of the
goods or properties, whichever is lower.
For transactions deemed sale, the output tax, in case of retirement or cessation
of business, shall be the acquisition cost or the current market price of the goods or
properties, whichever is lower. This likewise applies to all goods on hand, whether
capital goods, stock in trade, supplies or materials as of the date of retirement or
cessation of business.
Furthermore, Sec. 4.110-1 (d) of Revenue Regulations No. 16-2005 provides, viz.:
"Any input tax on the following transactions evidenced by a VAT invoice or
o cial receipt issued by a VAT-registered person in accordance with Secs. 113
and 237 of the Tax Code shall be creditable against the output tax: SEDIaH

xxx xxx xxx

(d) Transactions "deemed sale" under Sec. 106(B) of the Tax Code;

xxx xxx xxx"

On the issue of offsetting, the Supreme Court in Philex Mining Corporation vs.
Commissioner of Internal Revenue, Court of Appeals, and The Court of Tax Appeals
CD Technologies Asia, Inc. © 2018 cdasiaonline.com
 (G.R. No. 125704 dated August 28, 1998) citing the cases of Francis v. Intermediate
Appellate Court (162 SCRA 753) and Caltex Philippines v. Commission on Audit (208
SCRA 726) ruled that —
". . . taxes cannot be subject to compensation for the simple reason that the
government and the taxpayer are not creditors and debtors of each other. There is
a material distinction between a tax and debt. Debts are due to the Government in
its corporate capacity, while taxes are due to the Government in its sovereign
capacity. . . ."

Thus, any claim for tax credit or refund of alleged excess input tax by a VAT
registered taxpayer pursuant to Sections 110 and 112 both of the Tax Code of 1997,
shall be subject to veri cation by this O ce pursuant to existing rules and regulations.
Accordingly, until after the amount claimed as input taxes have been nally determined
to be legally due to the taxpayer, and a tax credit certi cate issued therefore, no
automatic offsetting of the amount claimed as input tax against the tax liability of the
taxpayer can be allowed. (BIR Ruling No. 415-93 dated October 15, 1993)
Moreover, should there be an excess input tax, Maple has the option to apply for
a tax credit or a refund of the same. A Tax Credit Certi cate duly issued by this O ce
shall upon proper application, be allowed to be used in payment of its other tax
liabilities.
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.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service

CD Technologies Asia, Inc. © 2018 cdasiaonline.com