SY-LED SM PRIME Holdings, Inc. is not obliged to pay value-added taxes (VAT) on cinema ticket sales as it is already paying amusement taxes, the Court of Tax Appeals has ruled.

The court also cancelled the Bureau of Internal Revenue’s assessment that the firm owes the national government taxes amounting to almost P264.48 million for the years 2002 and 2003.

In a 23-page decision penned by Associate Justice Erlinda P. Uy, the second division of the tax court said: ‘The activity of showing cinematographic films had not been considered as a ‘service’ that is to be covered by the value-added tax. Instead, it is considered as an ‘amusement activity’ subject to amusement tax.’

The government’s main revenue agency issued on separate dates on 2004 preliminary assessment notices for the firm’s supposed two-year tax deficiency. Anchoring its assessment on Revenue Memorandum Circular No. 28-2001 that spelled out the VAT treatment on admission receipts by operators of movie houses, the BIR handed out its final decision to collect the tax on August 2005, effectively denying SM Prime’s appeals.

SM Prime raised the dispute before the tax court in October 2005, saying that two levels of taxation – the VAT through the national government and the amusement tax imposed by local governments – would make the amusement industry among the highest taxed in the country. As a consequence, this would threaten the industry’s viability, it claimed.

Siding with SM Prime, the tax court said: ‘Going over the provisions of law, past and present, if it was the intention of the legislature to subject gross receipts derived by operators of cinema or theater houses from admission tickets to VAT, it would have done so in a clear and unambiguous manner.’

The imposition of taxes on film showings was originally provided under Section 260 of the Commonwealth Act, the predecessor of the National Internal Revenue Code.

Upon the issuance of Presidential Decree No. 231 or the Local Tax Code, however, the collection of taxes was transferred to the provincial government “to the exclusion of the national or municipal governments.�?

Subsequent changes to the Tax Code, the last one being in 1997, therefore did not include taxes on the proprietors and operators of theaters and cinemas, the tax court said.

The collection of amusement taxes now rests on the Local Government Code, and the jurisdiction falls on provincial governments, the tax court added.

The revenue agency cannot claim that film showing is a “service�? as indicated in the Tax Code.

“While the meaning of the phrase ‘sales or exchange or services’ remain the same, the intention of the legislature to subject to VAT specific kinds of sales or services is clear. Congress did not have the intention to use the general terms in their unrestricted sense, otherwise, it would have not have made an enumeration of particular subjects,�? the court said.

Cinema ticket sales or film showings could not be found under the phrase “sales or exchange of services�? in the Tax Code.

Because of this, the circular issued by the BIR in connection to the VAT on cinema ticket sales does not stand, the court said.

Even so, “there is no showing that the required notice, hearing and publication [for circulars]…has been complied with,�? it added