BIR Ruling [DA-007-05]

January 11, 2005 BIR RULING [DA-007-05] VFA; BIR Ruling No. 111-97 A. A. Amador & Associates Attorneys and Counsellors at Law 1612 Tower One, Ayala Triangle Ayala Ave., Makati City 1226 Attention: Atty . Maria Arlene M. Mendoza Gentlemen : This refers to your letter dated April 20, 2004 requesting on behalf of your client, Anderson Asphalt Philippine, Inc . (APPI) , for a ruling that the project of the US Navy in connection with the Visiting Forces Agreement (VFA), being a contract for the US Government, is exempt from the payment of the Value Added Tax (VAT). It is represented that AAPI is a corporation established and existing under Philippine laws; that it is engaged in the business of general construction; and it has been awarded a project by the US Navy at Fort Magsaysay, to commence in Mid-May of this year, 2004; and that, AAPI was advised/informed that its contract with the US Government is exempt from VAT under the provisions of the Visiting Forces Agreement. Based on the foregoing representations, you now request clarification that the said project awarded to AAPI by the US Navy, being a US Government is covered by the VAT exemption granted under the VFA. In reply, please be informed that pursuant to Section 3 of Revenue Regulations No. 6-97 dated January 2, 1997, implementing Republic Act No. 8241, an Act Amending R.A. No. 7716, otherwise known as the Expanded Value-Added Tax law (now Section 108(B)(3) of the Tax Code of 1997, as amended), " services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate ." In connection thereto, paragraph (1) of Article VII of the VFA provides that "United States Government equipment, materials, supplies, and other property imported into or acquired in the Philippines by or on behalf of the United States armed forces in connection with activities to which this agreement applies, shall be free of all Philippine duties, taxes and other similar charges. Title to such property shall remain with the United States, which may remove such property from the Philippines at any time, free from export duties, taxes, and other similar charges. The exemptions provided in this paragraph shall also extend to any duty, tax, or other similar charges which would otherwise be assessed upon such property after importation into, or acquisition within, the Philippines. Such property may be removed from the Philippines, or disposed of therein, provided that disposition of such property in the Philippines to persons or entities not entitled to exemption from applicable taxes and duties shall be subject to payment of such taxes, and duties and prior approval of the Philippine Government." In its effort to attain a degree of self-reliance in external defense, the Philippines has embarked on the modernization of its armed forces as the primary instrument for its external security. This effort is being supplemented by the network of bilateral defenses cooperation which the Philippines pursues with the United States and several of its friendly neighbors. Among the existing pacts is the Mutual Defense Treaty of 1951 ("1951 MDT) which is an important link in the chain of bilateral defense arrangements, which underpins the regional security of the Western Pacific. In short, the 1951 MDT provides the overall framework of the defense relationship between the Philippines and the United States. In short, the 1951 MDT between the Government of the Republic of the Philippines and the Government of United States of America is an international agreement. CHEIcS To give substance to the Mutual Defense Treaty of 1951 ("1951 MDT") and with closure of U.S. bases in 1992, the VFA was negotiated between the two governments. The VFA was signed on February 10, 1998 and was submitted to the Senate for concurrence. In essence, the VFA is a mechanism for regulating the circumstances and conditions under which United States forces may visit the Philippines for bilateral military exercises. The practice of providing a specific set of rules in the treatment of visiting foreign armed forces in another's territory, as embodied in the VFA, has been widely accepted in the international community. A military base agreement would normally incorporate provisions on the status of the foreign forces in the host country. But this is not true in cases where there is no foreign military base or installation in the host country like the Philippines. Thus, an agreement on the treatment of visiting forces, such as the VFA, may be concluded as independent agreements without the need for an existing base agreement. In fine, similar agreements were concluded by the United Nations in places where it deploys peace-keeping forces. While the military exercises are by no means exclusively limited to combat-related activities, there are also post-exercise activities being conducted under the VFA which include construction projects such as building and repairing school houses and barangay halls, and installation of deep wells. Considering the range and variety of activities being undertaken, the VFA grants certain privileges to the visiting forces which include, among others, exemption from payment of taxes. In reply, please be informed that under Section 3 of Revenue Regulations No. 6-97, implementing Republic Act (R.A.) No. 8241, an Act Amending R.A. No. 7716 (the "EVAT Law"), which reads as follows, viz: "SEC. 3. Zero-rating . Section 4.102-2(b) of Rev. Regs. No. 7-95 is hereby amended to read as follows: (b) Transactions Subject to Zero-Percent (0%) Rate The following services performed in the Philippines by VAT-registered persons shall be subject to zero-percent (0%) rate: xxx xxx xxx (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero-percent (0%) rate; This provision provides that services rendered to persons or entities whose exemption is clearly provided under international agreements, to which the Philippines is signatory, are effectively subject to zero-percent (0%) VAT. It must be noted that the VFA is an international agreement intended to give substance to the 1951 Mutual Defense Treaty. The provisions exempting from all Philippine duties, taxes and similar charges United States Government equipment, materials, supplies, and other property imported into or acquired in the Philippines by or on behalf of the United States armed forces in connection with activities to which the agreement applies, is in effect a grant of tax exemption. The VFA provisions on tax and duties exemptions are reasonable and standard international practice in the treatment of visiting foreign armed forces in another's territory in pursuit of mutually beneficial goals. Moreover, under the principle of international comity, 1 a state must recognize the generally accepted tenets of international law, among which are the principles of sovereign equality among states and of their freedom from suit without their consent, that limit the authority of a government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities, undertaken, in that capacity. Even when one enters the territory of another, there is an implied understanding that the former does not thereby submit itself to the authority and jurisdiction of the latter. Accordingly, services rendered by Anderson Asphalt Philippines, Inc . (AAPI) to the US Navy in connection with project undertaken under the Visiting Forces Agreement (VFA), being a contract for the US Government, shall effectively be subject to the a zero-rate (0%) VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. cHSIDa Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group Footnotes 1. The Philippine Constitution, indeed, has expressly adopted the generally accepted principles of international law as part of the laws of the land (Art. II, Sec. 2).