Not so tax-free: Determining the validity of the imposition of value added tax on tax-free exchanges

College

College of Law

Document Type

Archival Material/Manuscript

Abstract

Value added tax (VAT) is a tax on consumption. It is levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and the importation of goods into the Philippines. On July 10, 2011, the Bureau of Internal Revenue (BIR) issues Revenue Regulation 10-11 (RR 10-11), which imposes VAT on the exchange of goods and properties, including real properties used in business or held for sale or lease by the transferor, for shares of stock, whether or not it results to a change in control. In effect, it subjects a tax-free exchange, involving exchange of property (e.g., real property) for shares of stock of a corporation, to VAT. In this paper, however, the authors will argue that a tax-free exchange should not be subject to VAT. A tax-free exchange does not involve sale, barter or exchange because there is no actual transfer of ownership. It is also not conducted in the ordinary course of trade of business because it is not undertaken as a regular conduct or pursuit of a commercial or economic activity, nor a transaction incidental thereto. Therefore, RR 10-11 must be revoked for expanding the scope of the VAT law.

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Disciplines

Tax Law

Keywords

Value-added tax—Law and legislation—Philippines; Real property, Exchange of —Taxation—Law and legislation—Philippines

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