IBM Philippines, Inc.

February 16, 2007 BIR RULING [DA-101-07] DA 247-05 IBM Philippines, Inc. 2nd-4th Floors, IBM Plaza 8 Eastwood Avenue Eastwood City Cyberpark E. Rodriguez Jr. Avenue Libis, Quezon City Attention: Mr. John R. Bola Tax Manager Gentlemen : This refers to your letter dated November 17, 2006 relative to your letter dated October 12, 2006 stating that IBM Philippines, Inc. (IBM) is a domestic corporation duly organized and existing under the laws of the Philippines for the purpose of carrying on the business of merchants, brokers, traders, lessors, importers, exporters, and dealers in and with business machines, office equipment, telecommunications equipment and goods, wares, merchandise and commodities of every description, and to conduct and carry on all business appertaining thereto; that on the other hand, Asian Development Bank (ADB) is a multilateral development financial institution created by a special charter which is aimed at improving the welfare of the people in Asia and the Pacific; that IBM will sell new computer equipment to ADB and at the same time purchase used computer equipment from ADB; that there is no issue on the tax treatment of the sale by IBM to ADB; that on the sale by ADB of used equipment to IBM, ADB maintains that unless IBM can present a clear ruling from the BIR stating that the transaction is exempt from VAT, ADB requires that the related VAT on the sale shall be borne by IBM; that IBM is willing to pay the VAT if it can be claimed as input tax credit; that however, ADB will not issue a VAT invoice being an exempt entity and neither can IBM pay the VAT for and on behalf of ADB since this only applies to rental and royalty payments to non-resident corporations; that IBM is constrained to secure a BIR ruling confirming that the sale of goods by ADB to IBM is exempt from VAT; and that pursuant to Article 56 of the Charter of ADB and Section 34 of the Agreement between ADB and the Government of the Republic of the Philippines regarding the headquarters of ADB, its assets, property, income and its operations and transactions shall be exempt from all taxation and all customs duties. In connection therewith, you now request confirmation of your opinion that the sale by ADB to IBM of its capital assets is exempt from value-added tax pursuant to Section 109 (K) of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337, as implemented by Section 4.109-1 (B) (1) (k) of Revenue Regulations No. 16-2005. In reply thereto, please be informed that Section 4.109-1 (B) (1) (k) of Revenue Regulations No. 16-2005 provides that "(k) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws except those granted under P.D. No. 529-Petroleum Exploration Concessionaires under the Petroleum Act of 1949, shall be exempt from VAT. DAaEIc The BIR had already occasioned to rule on the matter when it said in BIR Ruling No. 028-85 dated February 27, 1985 as follows: "ADB shall be exempt from internal revenue taxes for which it is directly liable. Pursuant to Section 222 of the Tax Code, as amended, the documentary stamp tax shall be imposed upon documents, instruments and papers, and upon acceptance, assignment sales, and transfers of the obligation, right, property incident thereto and shall be paid by the person making, signing, issuing, accepting, or transferring the same at the time such act is done or transaction had. In the instant case, as the issuer of the checks, ADB is directly liable for the tax; however, since both the Charter and the Agreement provide that ADB, its assets, property, income, and its operations and transactions shall be exempt from all taxation, which is interpreted by this Office to mean exemption only from its direct liability for internal revenue taxes, ADB is, therefore, exempt from paying documentary stamp tax on the aforementioned checks issued by it." Corollarily, in BIR Ruling No. DA247-05 dated June 8, 2005 , this Office ruled that "xxx xxx xxx As stated in Article 56(1) of the ADB Charter, "the Bank, its assets, property, income and its operations and transactions, shall be exempt from all taxation and from all customs duties." This has to be interpreted to mean that transaction that may be made by ADB is also exempt from taxation imposed under the Tax Code. Consequently, whoever may be the party involved in the transaction entered by ADB, no DST can be imposed thereof." Considering that the ADB Charter and Philippine Agreement with ADB are international agreements to which the Philippines is a signatory as prescribed in Section 109 (k) of the R.A. No. 9337, as implemented by Revenue Regulations No. 16-2005, and considering further that VAT is the direct tax liability of the seller and the seller of the goods in the instant case is ADB, the sale by ADB is an exempt transaction under Section 109 (k) of R.A. No. 9337. 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. TDAHCS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service