VAT EXEMPTION OF TRANSFERS FOR CONTROL
Value-added tax, or VAT, is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayer’s role or link in the production chain. Thus, its imposition is intimately related to the regularity and consistency of the conduct of business in the ordinary course of trade.
The TRAIN, or Republic Act 10963, confirmed that transfers of property pursuant to Section 40(C)(2) of the Tax Code, or the so-called transfers for “control,” are exempt from VAT. This puts to rest the issue of whether VAT should be due when properties are transferred in exchange for shares in a corporation.
It has been our position, though, that even prior to the TRAIN, a transfer for control (where a transferor, alone or together with other persons not exceeding four, gains control in the transferee) should not be subject to VAT because it is not a sale transaction done in the ordinary course of trade, or business, or in the production chain.
Instead, it is a stock subscription with no change in effective or beneficial ownership. Since the owner of the property controls the shares of the corporation receiving it, it is like a transfer from one pocket to another. This is especially true for real properties, which became subject to VAT only in 1994.
When VAT was introduced in the Philippines by EO 273 in 1987, it covered only goods and services; it did not include real properties. In 1994, RA 7716 expanded the scope of “goods or properties” subject to VAT to include real properties. However, RA 7716 did not subject to VAT just any real property. It specified that only “real properties held primarily for sale to customers, or held for lease in the ordinary course of trade or business” became subject to VAT.
That VAT is imposed on sales in the “ordinary course of trade or business” continues to apply up to this date. Likewise, the coverage of real properties subject to VAT remains the same—it applies only to those held primarily for sale or lease in the ordinary course of trade or business—the same original scope introduced by RA 7716 in 1994.
Prior to 2008, the BIR issuances and regulations were consistent that transfers for control are not subject to VAT. However, in 2005, RR 16-05 changed the rules and held that the exchange of real estate properties held for sale or for lease, for shares of stocks whether resulting in corporate control or not, is subject to VAT. Such RR was issued pursuant to RA 9337, which amended certain VAT provisions. However, RA 9337 did not amend or expand the scope or coverage of real properties subject to VAT. In other words, despite no change in the relevant language in the law, the VAT-free nature of transfers for control was changed in the VAT regulations.
In 2008 (20 years after the adoption of the VAT system in the Philippines), the BIR Commissioner then revoked a certification ruling which confirmed that the transfer by a taxpayer of properties in exchange for shares of stock is not subject to VAT because “the real property which has been the subject of the above exchange is a property used in business.” However, transfers of real properties used in business (such as the land where a business facility is located) were never subject to VAT in the first place. Only those held primarily for sale or lease in the ordinary course of trade or business are subject to VAT.
Our courts have ruled that transfers not in the course of trade or business, including transfers for control, are not subject to VAT.
In the 2006 case of Commissioner of Internal Revenue vs Magsaysay Lines, Inc. (GR 146984, July 28, 2006), the Supreme Court ruled that no VAT was due on NDC’s public sale of its vessels because the transfer was not made in the course of trade or business, or outside the production chain. In the 2017 cases of Dominium Realty & Construction Corporation vs Commissioner of Internal Revenue (CTA Case No. 8887, April 6, 2017) and Northern Tobacco Redrying Co. Inc. vs Commissioner of Internal Revenue (CTA Case No. 8866, February 23, 2017), the CTA also held that the subject transfer of assets in exchange for shares is in the nature of stock subscriptions and not sales of assets, and thus, should not be subject to VAT. Noteworthy is that the Dominium case involved ordinary assets, or real properties held for sale or lease in the ordinary course of trade or business.
In sum, because transfers for control are not transfers in the production chain or transfers in the ordinary course of trade of business, they should not be subject to VAT, regardless of whether the assets transferred are held for sale or lease in the ordinary course of trade or business, or merely used in business. By expressly including transfers for control under Section 40(C)(2) of the Tax Code among the VAT-exempt transactions, the TRAIN has put the issue at rest. However, it should be borne in mind that even prior to the passage of the TRAIN, there is sufficient basis that no VAT should be due on transfers for control.
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Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is an expert in Philippine tax and corporate law. She acknowledges the contribution of Ms. Samantha Lao Poblacion to this article. This article is for general information only and is not a substitute for professional advice.
From the The Manila Times Website April 5, 2018
http://www.manilatimes.net/vat-exemption-of-transfers-for-control/390491/