BIR Ruling [DA-032-06]

February 8, 2006 BIR RULING [DA-032-06] Section 107 (A) Department of Health San Lazaro Compound Rizal Avenue, Sta. Cruz Manila Attention: Sec. Francisco T. Duque III, MD, MSc Gentlemen : This refers to your letter to the President dated December 7, 2005 indorsed to this Office by Undersecretary Gaudencio A. Mendoza, Jr. requesting exemption from payment of duties and taxes, more particularly, the value-added tax (VAT) on the importation of raw materials for the manufacture and packaging of avian flu drugs covered by a Memorandum of Agreement (MoA) between the Department of Health (DOH) and United Laboratories (UNILAB) invoking Section 10 of Republic Act (R.A.) 6675, otherwise known as the Generics Act of 1988. As represented, on November 30, 2005, a MoA was signed between the DOH and UNILAB in respect to the manufacture of the avian flu drug, Oseltamivir (Tamiflu() as a counter measure against pandemic influenza. UNILAB donated PhP70 million worth of Oseltamivir that would facilitate the manufacture of 500,000 capsules of the said drug. In the MoA, UNILAB agreed to import raw materials for the manufacture and packaging of the said drug from Roche, Inc. for donation to the government. However, such transaction is subject to the new final withholding VAT at the rate of 5%. As a result, the price per kilogram, which is approximately 7.350 Euro per kilogram, needs to be raised so as to cover the cost of this new tax. Consequently, this may limit the number of drugs to be donated for your frontline health workers and veterinarians. On the other hand, Section 10 of R.A. No. 6675 authorizes the DOH to import raw materials of which there is a shortage for the use of Filipino-owned or controlled drug establishments. Such importation of raw materials may be tax and duty-free as approved by the President. In reply, please be informed that your request cannot be granted without violating Section 28(4), Article VI of the 1987 Constitution which provides that no law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress. Section 10 of R.A. No. 6675 is actually not a grant of tax exemption privilege to the DOH who may import raw materials of which there is a shortage for the use of Filipino-owned or controlled drug establishments and which importation of raw materials may be tax and duty-free as approved by the President. As a general rule, the word "may" when used in a statute is permissive only and operates to confer discretion. In contrast, the word "shall" is imperative, operating to impose a duty which may be enforced (cited in Dizon vs. Encarnacion , L-18615, Dec. 24, 1963, 9 SCRA 714, 716-717). It is rule of statutory construction that tax exemptions are held strictly against the taxpayer, and if not expressly mentioned in the law must be within its purview by clear legislative intent ( Commissioner of Customs vs. Philippine Acetylene, Co., Inc ., L-22443, May 29, 1971, 39 SCRA 70). TcIaHC Moreover, government entities and instrumentalities, including government-owned or controlled corporations are subject to VAT. As a division of the executive branch, the DOH is subject to VAT if in the course of trade or business, it sells, barters, exchanges or leases goods or properties, or renders services and import goods. Importation is subject to 10% VAT based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise tax, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody pursuant to Section 107(A) of the Tax Code of 1997. In view of the foregoing, we regret to inform you that your request cannot be granted for lack of legal basis. 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 as null and void. Very truly yours, (SGD.) JOSE MARIO C BUAG Commissioner of Internal Revenue