The business community is awaiting eagerly how government authorities will eventually rule on the issue of whether or not transfer of goods and properties pursuant to a tax-free exchange transaction as well as sale of real properties used in business are indeed subject to the value-added tax.
The issue was actually raised before the Department of Finance by the group of Philippine Racing Club Inc and JTH Holdings which questioned a later BIR ruling that subjected the share swap transaction between PRCI and JTH covering the Santa Ana racetrack property to VAT.
PRCI and JTH anchor their argument that the share swap transaction is indeed VAT-exempt as the BIR earlier ruled based on Sec. 40 of the National Internal Revenue Code and Sec. 7 of the VAT Law.
Sec. 40 of the NIRC states that “no gain or loss shall be recognized if in pursuance of a plan of merger or consolidation, a corporation which is a party to a merger or consolidation exchanges property solely for stock in a corporation which is a party to the merger or consolidation.”
Meanwhile, Sec. 7 of the VAT Law states that sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing shall be exempt from VAT.
PRCI has argued that the Santa Ana property is principally being used as the location of the company’s racetrack and facilities necessary on the business of a race course, and therefore, the transfer of the property to JTH in exchange for shares in the latter should not be subject to the 12 percent VAT since the property is not held for sale or lease in the ordinary course of PRCI’s business.
It also stated that the property exchange which will result in PRCI having a 91.25 percent stake in JTH is treated as no gain or loss for the former, and therefore constitutes a tax-free exchange of properties.
PRCI officials explained that the company acquired publicly listed JTH Davies Holdings as a strategic business decision aimed at unlocking the full potential value of the Makati property in preparation for the eventual transfer of the races to PRCI’s new racecourse in Cavite. They say that the rationale is to spin off the property development to a business entity fully controlled by PRCI but separate and distinct from the primary business purpose of PRCI itself as a gaming corporation.
The consummation of the transaction however had to be set aside after the BIR revoked the VAT-exempt status of the transaction which the bureau on two occasions conferred. PRCI received a letter dated July 15, 2008 from the BIR that VAT will be imposed on the transaction because the exchange was treated as a sale.
According to PRCI officials, since the transaction was entered precisely because they knew that it was VAT-exempt and since now they are being asked to pay half a billion pesos in VAT, PRCI and JTH jointly decided to disengage from the deed of transfer with subscription agreement earlier signed by both parties.
If the DOF insists on the transaction being subject to VAT, PRCI officials said they may resort to the courts because the BIR cannot be way of a revenue regulation amend the Tax Code and the VAT Law.
PRCI and JTH have found support in the Tax Management Association of the Philippine (TMAP) which maintained that a transfer of property under Sec. 30 C2 of the Tax Code should not be subject to output VAT as originally stated in BIR Revenue Regulation 95. The group added that Republic Act no. 9337 or the EVAT Law did not introduce any change to the provisions of the VAT Law that will warrant a departure from the rule exemption from VAT transactions falling under this section of the 1997 Tax Code.
TMAP added that the subsequent BIR regulations effectively expanded the transactions subject to VAT under the Tax Code and worse, RR 4-2007 indiscriminately created an exception for tax-free exchange transactions involving a transfer by a real estate dealer to another dealer and exempted from VAT tax-free exchange transactions involving such parties. In short, this provision under RR 4-2007, which amounts to an amendment of the law, is ultra vires or void for not being within the power of the BIR to enact.
PRCI has also warned that subjecting such an exchange to VAT not only affected the transfer of property by PRCI to JTH but also many big transactions now in the news involving huge corporations.
As correctly pointed by PRCI officials, this column has written about this deal several times and not once was their side aired out. We have said that the half a billion in VAT that would be generated from this transaction would go a long way in helping government meet its revenue targets. It’s just fair that we finally write about PRCI’s standpoint.
How the DOF and eventually the courts will finally rule on this matter will indeed have serious repercussions on the way business is conducted in this country. Let’s hope that whatever the outcome will be would have considered all possible repercussions.
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