The gross receipts of cinema operators from admission tickets are value-added tax (VAT)-exempt and subject only to a 30% amusement tax under the Local Government Code (LGC), the Court of Tax Appeals said.

Ruling on four consolidated cases, the court’s first division ordered the cancellation of the Bureau of Internal Revenue’s (BIR) VAT assessment on First Asia Realty Development Corp. and its majority shareholder, SM Prime Holdings, Inc., worth P257.9 million for 1999, 2000, 2002 and 2003.

Sy-led SM Prime is the largest mall operator nationwide and has a 54% stake in subsidiary First Asia Realty.

Presiding Justice Ernesto D. Acosta said while VAT was levied on the sale of goods and services, ‘our tax laws, past and present, did not adopt more specific terms in defining ‘sale or exchange of services’ to include the showing of films in public by the owners, operators or proprietors of movie/cinema houses or theaters as subject to value-added tax.’

Mr. Acosta noted that Executive Order 273 issued by President Corazon Aquino has provisions exempting from VAT those services already subject to a percentage or amusement tax.

He added even Section 125 of the National Internal Revenue Code, which imposed an amusement tax on cockpits, cabarets, night or day clubs, boxing exhibitions professional basketball games, jai-alai and racetracks ‘excludes proprietors/operators of theaters or cinemas’ from the same since the tax on cinemas was included in the LGC.

Mr. Acosta also cited a joint resolution passed by the House of Representatives on Nov. 15, 2005 which stated ‘there should only be one business tax applicable to theaters and movie houses, same being the top rate of 30% amusement tax imposed by cities and provinces under the Local Government Code of 1991.’

The court invalidated revenue memorandum circular 28-2001 which provided the 10% VAT on the gross receipts from admission to amusement places, including cinema houses, ‘as there is no showing that there was due notice, hearing and publication’ of the circular.

It added the tax code did not expressly provide a VAT on cinema operators. Administrative measures, the court noted, should be in harmony with laws enacted by Congress.

‘This is not a question of interpretative ruling but want of a law imposing value-added tax on such activity,’ it said.

Sought for comment, the BIR’s litigation division said it would file an appeal. It maintained that the sale of admission tickets in cinemas was not among the businesses subject to percentage tax that are VAT-exempt.

Lead counsel Paul Velasco said the LGC did not exclude the imposition of National Government taxes on establishments that are paying percentage or amusement tax.

The tax bureau first sent a preliminary assessment notice to First Asia Realty on May 15, 2002 on a VAT deficiency of P35.8 million for 1999. This was followed by several other assessments and formal letters of demand for 2000, 2002 and 2003.

SM Prime was made to pay P124 million in deficiency VAT for the year 2000 alone. The BIR denied the protests of both First Asia Realty and SM Prime, which led to the filing of four separate cases at the tax appeals court. These were consolidated on Aug. 25, 2005.