Real property and personal property are not

subject to VAT under a 40 (c)(2) exchange

BIR RUL 24 - 05

Facts
Parties:
PSPC - Pilipinas Shell Petroleum Corporation
SGLPI - Shell Gas LPG Philippines, Inc.
SGHBV - Shell Gas Holdings BV

PSPC assigned its LPG business, its fixed assets,
and inventory to SGLPI. In exchange, PSPC
receives shares of stock of SGLPI. The entire
exchange was conducted through a tax-free
exchange pursuant to Section 40(C)(2) of the
NIRC. The exchange was integral of the
reorganisation of the LPG business of PSPC
worldwide. Pursuant to the reorganisation plan,
PSPC intends to assign the SGLPI shares to
SGHBV. It is envisioned the SGHBV will hold and
own the shares of stock of all Shell entities
worldwide which are engaged in the LPG
business.

Issues
1. W/N the assignment by PSPC of its fixed
assets and inventory of its LPG business to
SGLPI in exchange for shares of stock is a
tax-free exchange transaction under
Section 40(C)(2)

2. W/N such transfer is subject to VAT

Held
1. YES, the assignment of fixed assets and
inventory in exchange for shares of stock is
a tax-free exchange transaction under
Section 40(C)(2).

2. The transfer of FIXED ASSETS is NOT
subject to VAT. The transfer or INVENTORY
is subject to VAT.

Ratio
VAT is imposed on the sale, barter or exchange in
the course of trade or business, including
transactions incidental thereto, as long as there is
an actual change of ownership over such goods or
properties.

The underlying assumption of tax-free exchange
provisions generally is that the new property
received is substantially a continuation of the old
investment still unliquidated. Thus, the said
transaction does not constitute a sale or exchange
of property in the course of trade or business.
Hence, the conveyance of assets, property and
equipment used in business but not for sale in the
ordinary course of trade or business is not subject
to VAT.

The phrase "in the course of trade or business"
connotes regularity of activity.

The phrase "in the course of trade or business"
does not contemplate an activity that can no
longer be repeated or carried on with regularity.

The word "incidental" contemplates an activity
that necessarily follows the carrying out of the
primary function.

The transfer by PSPC of the Fixed Assets of its
LPG business to SGLPI in exchange for the latter's
shares of stock pursuant to a tax-free exchange
transaction under Section 40(C)(2) of the Tax
Code of 1997 is by reason of a reorganization, a
transaction which is not done with regularity and
would no longer be repeated. The assignment of
the Fixed Assets is not undertaken in the course
of PSPC's regular conduct of trade or business or
in pursuit of a commercial or an economic
activity, nor is it incidental thereto. The Fixed
Assets are not held by PSPC for sale or for lease
in the ordinary course of trade or business.
Furthermore, the Fixed Assets do not constitute
PSPC's stock-in-trade or inventory. Consequently,
the assignment of the Fixed Assets is not subject
to VAT.

However, the assignment by PSPC of the
Inventory of its LPG business to SGLPI, although
it does not occur in the regular conduct by PSPC
of its trade or business and is a transaction which
is not done with regularity and would no longer
be repeated is nevertheless subject to VAT
pursuant to Revenue Regulations No. 16-2005.
The transfer by PSPC of its Inventory which
constitutes stock-in-trade and is deemed an
ordinary asset is subject to VAT.

RevReg 16-2005
(B) Transactions Deemed Sale The following
transactions shall be deemed sale:
(1) Transfer, use or consumption not in the
course of business of goods or properties
originally intended for sale or for use in the
course of business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in
the profits of the VAT-registered persons;
or
(b) Creditors in payment of debt;
(c) Consignment of goods if actual sale is
not made within sixty (60) days following
the date such goods were consigned; an
(d) Retirement from or cessation of
business, with respect to inventories of
taxable goods existing as of such
retirement or cessation.