CIR vs. CA and COMASERCO, G.R. No.

125355
• Commissioner of Internal Revenue, petitioner
• CA and Commonwealth Management and Services Corporation,
respondents
CIR vs. CA and COMASERCO, G.R. No. 125355
• Commonwealth Management and Services Corp. (COMASERCO) is a
corporation duly organized and existing under the laws of the
Philippines. It is an affiliate of Philippine American Life Insurance Co.
(Philamlife), organized by the latter to perform collection, consultative
and other technical services, including functioning as an internal
auditor, of Philamlife and its other affiliates.
• On January 24, 1992, the BIR issued an assessment to Commonwealth
Management and Services Corp. (COMASERCO) for deficiency value-
added tax (VAT) amounting to P351,851.01, for taxable year 1988
• On February 10, 1992, COMASERCO filed with the BIR, a letter-protest
objecting to the latter's finding of deficiency VAT. On August 20, 1992,
the Commissioner of Internal Revenue sent a collection letter to
COMASERCO demanding payment of the deficiency VAT.
CIR vs. CA and COMASERCO, G.R. No. 125355
• On September 29,1992, COMASERCO filed with the CTA a petition for
review contesting the Commissioner's assessment. Its arguments are as
follows:
o The services it rendered to Philamlife and its affiliates, relating to collections,
consultative and other technical assistance, including functioning as an internal
auditor, were on a "no-profit, reimbursement-of-cost-only" basis;
o That it was not engaged in the business of providing services to Philamlife and
its affiliates and that it was established to ensure operational orderliness and
administrative efficiency of Philamlife and its affiliates, and not in the sale of
services; and
o That it was not profit-motivated, thus not engaged in business. In fact, it did not
generate profit but suffered a net loss in taxable year 1988. Since it was not
engaged in business, it was not liable to pay VAT.
CIR vs. CA and COMASERCO, G.R. No. 125355
• CTA: Denied COMASERCO's petition. Affirmed the Commissioner's
deficiency VAT assessment for the year 1988.
• CA: Reversed CTA ruling. Cancelled the assessment for deficiency VAT
for the year 1988. The basis for the CA's ruling was a prior ruling it
made in another case involving COMASERCO, where it was held that
COMASERCO was not liable to pay fixed and contractor's tax for services
rendered to Philamlife and its affiliates and as such was not engaged in
business of providing services to Philamlife and its affiliates.

Hence, the instant petition for review on certiorari by the

Commissioner.
CIR vs. CA and COMASERCO, G.R. No. 125355

Whether or not COMASERCO was engaged in the

sale of services, and thus liable to pay VAT thereon.
CIR vs. CA and COMASERCO, G.R. No. 125355

Petition granted. Reversed CA ruling. Reinstated

CTA ruling.
COMASERCO ordered to pay deficiency VAT as per
the assessment issued by the Commissioner for the
taxable year 1988.
CIR vs. CA and COMASERCO, G.R. No. 125355
Who are the persons liable for VAT?

"Section 99, NIRC. Persons liable. - Any person who, in the course of
trade or business, sells, barters or exchanges goods, renders services, or
engages in similar transactions and any person who imports goods shall
be subject to the value-added tax (VAT) imposed in Sections 100 to 102
of this Code.""
CIR vs. CA and COMASERCO, G.R. No. 125355
What does "in the course of trade or business" mean?
COMASERCO: The term "in the course of trade or business" requires that the
"business" is carried on with a view to profit or livelihood. In other words, the
activities of the entity must be profit-oriented.
SC: Under Sec. 105 (Persons Liable) of R.A. No. 7716, or the Expanded VAT Law
(EVAT), the phrase "in the course of trade or business" means the regular
conduct or pursuit of a commercial or an economic activity, including
transactions incidental thereto, by any person regardless of whether or not the
person engaged therein is a nonstock, nonprofit organization (irrespective of the
disposition of its net income and whether or not it sells exclusively to members
of their guests), or government entity.
This definition applies to all transactions even to those made prior to the
enactment of the EVAT Law, which merely stresses that even a nonstock,
nonprofit organization or government entity is liable to pay VAT for the sale of
goods and services.
CIR vs. CA and COMASERCO, G.R. No. 125355
Are non-stock, nonprofit organizations or government entities (such as
COMASERCO) liable to pay VAT for the sale of goods and services?

COMASERCO: No, profit motive is material in ascertaining who to tax for

purposes of determining liability for VAT.

SC: Yes, even a non-stock, non-profit, organization or government entity, is

liable to pay VAT on the sale of goods or services.
CIR vs. CA and COMASERCO, G.R. No. 125355
It is immaterial whether the primary purpose of a corporation indicates that it
receives payments for services rendered to its affiliates on a reimbursement-on-
cost basis only, without realizing profit, for purposes of determining liability for
VAT on services rendered. As long as the entity provides service for a fee,
remuneration or consideration, then the service rendered is subject to VAT.

This contention finds support in BIR Ruling No. 010-98 issued by the
Commissioner on February 5, 1998, which provides that a domestic corporation
that provided technical, research, management and technical assistance to its
affiliated companies and received payments on a reimbursement-of-cost basis,
without any intention of realizing profit, was subject to VAT on services
rendered. In fact, even if such corporation was organized without any intention
of realizing profit, any income or profit generated by the entity in the conduct of
its activities, was subject to income tax.
CIR vs. CA and COMASERCO, G.R. No. 125355
Is COMASERCO liable to pay VAT?

COMASERCO: Because COMASERCO is not motivated by profit, as defined

by its primary purpose in the articles of incorporation, stating that it is
operating "only on reimbursement-of-cost basis, without any profit," it
couldn't be said that it is performing acts in the course of trade or
business. Hence, it is not liable for the payment of VAT.

SC: The services rendered by COMASERCO to Philamlife and its affiliates

are subject to VAT. The performance of all kinds of services for others for a
fee, remuneration or consideration is considered as sale of services
subject to VAT. (See items 1-3 in ratio.)
CIR vs. CA and COMASERCO, G.R. No. 125355
Can the CA's ruling in a prior case involving COMASERCO be made
applicable in the instant case?

SC: No. The issue in the first case (i.e., whether COMASERCO is engaged in
business to determine liability for the payment of fixed and percentage
taxes), is different from the present case, which involves COMASERCO's
liability for VAT.
Who are required to register for VAT?
• Sec. 236 (G) Persons Required to Register for Value Added Tax. –
1. Any person who, in the course of trade or business, sells, barters or exchanges
goods or properties, or engages in the sale or exchange of services, shall be liable
to register for value-added tax if:
a. His gross sales or receipts for the past twelve (12) months, other than those that are
exempt under Section 109 (A) to (BB), have exceeded Three million pesos
(Php3,000,000.00);
b. There are reasonable grounds to believe that his gross sales or receipts for the next
twelve (12) months, other than those that are exempt under Section 109 (A) to (BB), will
exceed Three million pesos (Php3,000,000.00);
2. Every person who becomes liable to be registered under paragraph (1) of this
Subsection shall register with the Revenue District Office which has jurisdiction
over the head office or branch of that person, and shall pay the annual
registration fee prescribed in Subsection (B) hereof. If he fails to register, he shall
be liable to pay the tax under Title IV as if he were a VAT-registered person, but
without the benefit of input tax credits for the period in which he was not
properly registered.
Optional VAT Registration
• Sec. 236 (H) Optional Registration for Value-added Tax of Exempt Peron. –
1. Any person who is not required to register for value-added tax under
Subsection (G) hereof may elect to register for value-added tax by registering
with the Revenue District Office that has jurisdiction over the head office of that
person, and paying the annual registration fee in Subsection (B) hereof;
2. Any person who elects to register under this Subsection shall not be entitled to
cancel his registration under Subsection (F)(2) for the next three (3) years.
Provided, that any person taxed under Section 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of
the NIRC who elected to pay the eight percent (8%) tax on gross sales or receipts
shall not be allowed to avail of this option.
For purposes of Title IV of this Code, any person who has registered value-added
tax as a tax type in accordance with the provisions of Subsection (C) hereof shall
be referred to as a ‘VAT-registered persons’ who shall be assigned only one
Taxpayer Identification Number (TIN).
Optional VAT Registration
If you’re an existing VAT-registered taxpayer, and your gross sales/receipts
in the preceding taxable year did not exceed the VAT threshold of
Php3,000,000.00, could you still continue to be a VAT-registered taxpayer?

Yes. You just have to avail of the “Optional Registration for Value-Added Tax
of Exempt Person,” file a BIR Application for Registration Update (BIR Form
No. 1905), and submit the same with the accompanying documentary
requirements with the BIR.

Note that once you’ve availed of this option, you may not cancel your VAT
registration for the next three (3) years.
Optional VAT Registration
What if you’re an existing VAT-registered taxpayer, and your gross
sales/receipts in the preceding taxable year did not exceed the VAT threshold
of Php3,000,000.00 and you’ve decided to be a Non-VAT registered taxpayer,
what are you supposed to do?

Under RR 13-2018, a taxpayer should file a BIR Application for Registration

Update (BIR Form No. 1905) for an update of registration from VAT to Non-
VAT and accomplish the following requirements:
– submit an inventory list of unused invoices and/or receipts as of the date of filing of
BIR Form No. 1905, indicating the number of booklets and its corresponding serial
numbers; and
– Surrender the said invoices and/or receipts for cancellation.
Sec. 109(2). VAT-Exempt Transactions
• Products, service, or groups that will continue to be VAT-exempt
• Food and agricultural products
• Senior citizens
• Persons with Disability (PWD)
• Cooperatives
• Tourism
• Education
• Renewable energy
• Health
• Enterprises and BPOs located in Special Economic Zones
• Condominium association dues
• Rentals and leases below P15,000 per month
SEC. 4.109-1. VAT-Exempt Transactions
• Groups, products, or transactions that will be VAT-exempt
• Businesses with annual gross sales of P3 million and below
• Government owned and controlled corporations (GOCCs),
state universities and colleges (SUC), and government
agencies
• Medicines for diabetes, cholesterol, and hypertension (VAT
exemption beginning 2019)
• Socialized housing, or houses priced at P450,000 and below,
and low-cost housing, or those priced at P3 million and
below (VAT exemption retained from 2018 to 2020 only)

18
SEC. 4.109-1. VAT-Exempt Transactions
(d) Importation of professional instruments and implements, tools of
trade, occupation or employment, wearing apparel, domestic animals, and
personal and household effects belonging to:
1. Persons coming to settle in the Philippines or
2. Filipinos or their families and descendants who are now residents or
citizens of other countries, such parties hereinafter referred to as
overseas Filipinos,
a. In quantities and of the class suitable to the profession, rank or
position of the persons importing said items;
b. For their own use;
c. Not for barter or sale; and
d. Accompanying such persons, or arriving within a reasonable time:

19
SEC. 4.109-1. VAT-Exempt Transactions
Bureau of Customs may exempt such goods from payment of duties and taxes
subject to:

1. The production of satisfactory evidence that such persons are actually

coming to settle in the Philippines; and

2. That the goods are brought from their former place of abode.

Vehicles, vessels, aircrafts, machineries and other similar goods for use in
manufacture, shall not fall within this classification and shall therefore be
subject to duties, taxes and other charges;

20
SEC. 4.109-1. VAT-Exempt Transactions
(p) The following sales of real properties are exempt from
VAT, namely:

1) Sale of real properties not primarily held for sale to

customers or held for lease in the ordinary course
of trade or business

2) Sale of real properties utilized for low-cost housing

as defined by RA No. 7279, otherwise known as the
"Urban Development and Housing Act of 1992" and
other related laws.
21
SEC. 4.109-1. VAT-Exempt Transactions
(p) The following sales of real properties are exempt from
VAT, namely:

(3) Sale of real properties utilized for socialized housing as defined under RA No.
7279, and other related laws, such as RA No. 7835 and RA No. 8763, wherein the
price ceiling per unit is P450,000.00 or as may from time to time be determined by
the HUDCC and the NEDA and other related laws.

(4) Sale of residential lot valued at One Million Five Hundred Thousand Pesos
(P1,500,000.00) and below, or house & lot and other residential dwellings valued at
Two Million Five Hundred Thousand Pesos (P2,500,000.00) and below, as adjusted
in 2011 using the 2010 Consumer Price Index values.

22
SEC. 4.109-1. VAT-Exempt Transactions
Beginning January 1, 2021, the VAT exemption shall only apply to:

1. sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business

2. Sale of real property utilized for socialized housing as defined by Republic

Act No. 7279,

3. Sale of house and lot, and other residential dwellings with selling price of
not more than Two Million Pesos (P2,000,000.00)

23
SEC. 4.109-1. VAT-Exempt Transactions
(q) Lease of residential units with a monthly rental per unit not exceeding
Fifteen Thousand Pesos (P15,000.00).

The foregoing notwithstanding, lease of residential units where the

monthly rental per unit exceeds Fifteen Thousand Pesos (P15,000.00), but
the aggregate of such rentals of the lessor during the year do not exceed
Three Million Pesos (P3,000,000.00) shall likewise be exempt from VAT;
however, the same shall be subject to three percent (3%) percentage tax
under Section 116 of the Tax Code.

24
SEC. 4.109-1. VAT-Exempt Transactions
Illustration 1: A lessor rents his 15 residential units for P14,500 per month.
During the taxable year, his accumulated gross receipts amounted to
P2,610,000. He is not subject to VAT since the monthly rent per unit does
not exceed P15,000. He is also not subject to 3% Percentage Tax.

Using the same example, assuming he has 20 residential units with the same
monthly rent per unit and his accumulated gross receipts during the taxable
year amounted to P3,480,000, he is still not subject to VAT even if the
accumulated earnings exceeded P3,000,000 since the monthly rent per unit
does not exceed P15,000. He is also not subject to 3% Percentage Tax.

25
SEC. 4.109-1. VAT-Exempt Transactions
Illustration 2: A lessor rents his 15 residential units for P15,500 per month.
During the taxable year, his accumulated gross receipts amounted to
P2,790,000. He is not subject to VAT since his accumulated gross receipts did
not exceed P3,000,000. He is, however, subject to 3% Percentage Tax since the
monthly rent per unit is more than P15,000.00.

Using the same example, assuming he has 20 residential units with the same
monthly rent per unit and his accumulated gross receipts during the taxable
year amounted to P3,720,000, he is already subject to VAT since the
accumulated earnings exceeded P3,000,000 and the monthly rent per unit is
more than P15,000.00.

26
SEC. 4.109-1. VAT-Exempt Transactions
Illustration 3: A lessor rents his 2 commercial and 10 residential units for
monthly rent of P60,000 and P15,000 per unit, respectively. During the taxable
year, his accumulated gross receipts amounted to P3,240,000 (P1,440,000 from
commercial units and P1,800,000 from residential units). The P1,440,000 from
commercial units is not subject to VAT since it did not exceed P3,000,000. It is,
however, subject to 3% Percentage Tax. On the other hand, the P1,800,000
accumulated receipts from the residential units are not subject to Percentage
Tax and exempt from VAT since the monthly rent is not more than P15,000.

27
SEC. 4.109-1. VAT-Exempt Transactions
Using the same example, assuming the lessor has 5 commercial units and his
accumulated gross receipts during the taxable year amounted to P5,400,000
(P3,600,000 from commercial units and P1,800,000 from residential units),
he is subject to VAT with respect to P3,600,000 since it exceeded P3,000,000.
The P1,800,000 accumulated receipts from residential units are not subject
to Percentage Tax and exempt from VAT since the monthly rent is not more
than P15,000.

28
SEC. 4.109-1. VAT-Exempt Transactions
Illustration 4: A lessor rents his 5 commercial and 10 residential
units for monthly rent of P60,000 and P15,500 per unit,
respectively. During the taxable year, his accumulated gross
receipts amounting to P5,460,0000 (P3,600,000 from
commercial units and P1,860,000 from residential units) shall be
subject to VAT since it exceeded the P3,000,000 threshold and
the monthly rent of residential units is more than P15,000.

29
SEC. 4.109-1. VAT-Exempt Transactions

(s) Transport of passengers by international

carriers;

30
SEC. 4.109-1. VAT-Exempt Transactions

(t) Sale, importation or lease of passenger or cargo vessels and

aircraft, including engine, equipment and spare parts thereof for
domestic or international transport operations: Provided, however,
that the exemption from VAT on the importation and local purchase of
passenger and/or cargo vessels shall be subject to the requirements
on restriction on vessel importation and mandatory vessel retirement
program of Maritime Industry Authority (MARINA);

31
SEC. 4.109-1. VAT-Exempt Transactions

(u) Importation of fuel, goods and supplies by persons

engaged in international shipping or air transport
operations: Provided, That the fuel, goods and supplies
shall be used for international shipping or air transport
operations.

32
SEC. 4.109-1. VAT-Exempt Transactions

(w) Sale or lease of goods and services to senior citizens and

persons with disabilities, as provided under Republic Act Nos.
9994 (Expanded Senior Citizens Act of 2010) and 10754 (An
Act Expanding the Benefits and Privileges of Persons with
Disability), respectively;

33
SEC. 4.109-1. VAT-Exempt Transactions

(x) Transfer of Property pursuant to Section

40(C)(2) of the Tax Code, as amended;

34
SEC. 4.109-1. VAT-Exempt Transactions

(y) Association dues, membership fees, and other

assessments and charges collected on a purely
reimbursement basis by homeowners’ associations and
condominium corporations established under Republic Act
No. 9904 (Magna Carta for Homeowners and Homeowners’
Association) and Republic Act No. 4726 (The Condominium
Act), respectively;

35
SEC. 4.109-1. VAT-Exempt Transactions

(z) Sale of gold to the Bangko Sentral

ng Pilipinas;

36
SEC. 4.109-1. VAT-Exempt Transactions
(aa) Sale of drugs and medicines prescribed for
diabetes, high cholesterol, and hypertension to
beginning January 1, 2019 as determined by the
Department of Health; and

37
SEC. 4.109-1. VAT-Exempt Transactions

(bb) Sale or lease of goods or properties or the

performance of services other than the transactions
mentioned in the preceding paragraphs, the gross
annual sales and/or receipts do not exceed the
amount of Three Million Pesos (P3,000,000.00).

38
VAT-Exempt Transactions
Self-employed individuals and professionals availing
of the 8% tax on gross sales and/or receipts and other
non-operating income, under Sections 24(A)(2)(b)
and 24(A)(2)(c)(2)(a) of this Code shall also be exempt
from the payment of twelve (12%) VAT.

39
Q/As 6, RMC No. 46-2008
Q-6:
Can on-line international air carriers opt to be under the VAT system and be
subject to VAT at zero-rate on their outbound international operations similar
to domestic air carriers registered as domestic corporations?
A-6:
No. The business of an international air carrier is exempt from VAT because it is
a sale of services subject to percentage tax. If the main business is exempt
from VAT, the VAT-exempt person cannot elect that the said exempt
business/es be placed under the VAT system. The option to be subject to VAT
on its exempt transactions is available only to a VAT-registered person pursuant
to Section 109(2) of the Code, as amended by R.A. 9337.

40
Q/As 30, RMC No. 46-2008
Q-30:
Can an international airline company who is engaged in other activities subject
to VAT, i.e. leasing of properties, etc., elect that all its business activities be
subject to VAT?
A-30:
No. The main or principal business of an international airline company is VAT-
exempt because the same is subject to the percentage tax under Title V of the
Tax Code. Therefore, the international airline can not elect that its exempt
principal business be subject to VAT even if its secondary businesses are
subject to VAT.

41
Q/As 31, RMC No. 46-2008
Q-31:
How do we determine the main or principal business of a taxpayer who is
engaged in mixed business activities?
A-31:
In determining the main or principal business of a taxpayer, we apply the pre-
dominance test. Under this test, if more than fifty percent (50%) of its gross
sales and/or gross receipts comes from its business/es subject to VAT, its
main/principal business falls within the VAT system making its status as a VAT
person. Otherwise, he cannot be considered as a VAT person eligible for the
election provided for under Section 109(2) of the Tax Code.

42
SEC. 4.109-2. Exempt Transactions may be
Registered for VAT Purposes
— A VAT-registered person may, in relation to Sec. 236 (H) of the 1997 Tax
Code, as amended, elect that the exemption in Sec. 4.109-1(B) hereof shall
not apply to his sales of goods or properties or services. Once the election is
made, it shall be irrevocable for a period of three (3) years counted from the
quarter when the election was made except for franchise grantees of radio
and TV broadcasting whose annual gross receipts for the preceding year do
not exceed ten million pesos (P10,000,000.00) where the option becomes
perpetually irrevocable.

43
SEC. 4.109-2. Exempt Transactions may be
Registered for VAT Purposes
WPM is a rice dealer . His total annual gross sales and/or receipts do not exceed Three
Million (P3,000,000.00), allowing him to avail the following:

(a) WPM is a VAT-exempt taxpayer. He may elect to avail of the optional registration for VAT
of exempt person under Section 236 (H) of the 1997 Tax Code, as amended. Upon election of
such option, he shall not be entitled to cancel his VAT registration for the next three (3) years;

(b) WPM may elect to pay the 8% commuted tax rate on gross sales or receipts and other
non-operating income in lieu of the graduated income tax rates and the percentage tax
under Section 24(A)(2)(b) of the 1997 Tax Code, as amended, since his gross sales or receipts
did not exceed Three Million Pesos (P3,000,000) during the taxable year. If he elects to pay
the 8% commuted tax, he shall not be allowed to avail of the optional registration for VAT of
exempt person provided by Section 236(H) of the 1997 Tax Code, as amended.
44