BIR Denies M.C. Holdings Corporation’s Request for VAT Exemption on Property Dividends

On 11 April 2024, the Bureau of Internal Revenue (“BIR”) issued a ruling denying the reconsideration filed by M.C. Holdings Corporation (the “Corporation”) seeking value added tax (“VAT”) exemption on the distribution of its property dividends constituting stocks in trade or properties primarily held for sale or lease, to its stockholders. 

Following Sections 4.106-7(a)(2) of Revenue Regulation (“RR”) No. 16-2005, as amended by RR No. 4-2007, the BIR held that the property dividends distributed by the Corporation are subject to VAT based on the zonal or fair market value, whichever is higher, at the time of distribution, notwithstanding the Corporation’s registration as a non-VAT registered entity.

The BIR explained that VAT liability does not depend on the taxpayer’s registration. An entity may still be liable for VAT, regardless of whether they are VAT-registered, depending on the application of the 1997 Tax Code. To illustrate, an individual must pay VAT when his earning exceeds the VAT threshold even if he is not VAT-registered. Similarly, for imports, VAT must be paid regardless of the VAT registration status.

The BIR also noted the importance of adherence to documentary requirements when seeking for tax exemption. Citing National Power Corporation vs. Province of Isabela, tax exemptions should be granted only by clear and unequivocal provision of law. According to Section 5 of BIR Revenue Memorandum Order No. 9-2014, a request for ruling must be accompanied by (1) a certified true copy of all documents material to the transaction; (2) proof that taxpayer is entitled to exemption or incentive; and (3) a special power of attorney in case the request is filed by a representative of the taxpayer. 

Due to the Corporation’s non-compliance to these requirements, the BIR was constrained from issuing a tax ruling, although without prejudice to the filing of another request for ruling so long as the Corporation meets all the requirements.