BIR Ruling [DA-156-99]

March 16, 1999 BIR RULING [DA-156-99] Hon. Raul M. Molintas Provincial Governor of Benguet La Trinidad, Benguet S i r : This refers to your letter dated February 10, 1999 requesting for a Certificate of Exemption from ad valorem tax and VAT on the vehicles, equipments, computers and materials necessary in the execution of the "Project For Improvement of Health System For the Province of Benguet". Documents submitted show that the said project is covered by the Exchange of Notes dated January 21, 1998 and May 8, 1998 between the Government of the Republic of the Philippines and the Government of Japan, thru the Japan International Cooperation Agency (JICA), the implementing arm for technical cooperation and grant aid programs of the latter; that the Exchange of Notes, among others, state under Par. 6(1); that the Government of the Republic of the Philippines will take necessary measures "to exempt Japanese nationals from customs duties, internal taxes and other fiscal levies which may be imposed in the Republic of the Philippines with respect to the supply of the products and services under the Verified Contracts"; that in connection with the Exchange of Notes dated January 21, 1998, the Provincial Government of Benguet has entered into a contract with Nissho Iwai Corporation for the supply and delivery of vehicles and equipment necessary for the project; and that in connection with the Exchange of Notes dated May 8, 1998, the Provincial Government of Benguet has entered into contracts with (1) Tobishima Corporation for building, electrical and mechanical works; and (2) Nissho Iwai Corporation for the supply and installation of equipment. You have also represented that His Excellency, President Estrada, has granted your request for the total exemption of the vehicles, equipment and computers from the payment of customs duties, as evidenced by his marginal note on your letter dated January 21, 1999. In reply, please be informed that based on the foregoing, Nissho Iwai Corporation, a Japanese corporation with address at 4-5 Akasaka 2-chrome, Minato-ku, Tokyo is exempt from the payment of 10% VAT and ad valorem tax respectively imposed under Sections 107 and 108 of the Tax Code of 1997 on its importation of equipment necessary for the project and on its services for the installation thereof. It is likewise exempt from the ad valorem tax imposed under Sec. 149 of the same Code on its imported vehicles, e.g., audio-visual van and three (3) ambulances. On the other hand, Tobishima Corporation, also a Japanese corporation with address at 2 Sanbacho, Chiyoda-ku-Tokyo which is undertaking the construction of a new building and equipment for Benguet General Hospital, is likewise not subject to the 10% VAT. It is of course understood that the aforesaid tax exemption privilege is accorded only to Tobishima Corporation and Nissho Iwai Corporation on taxes for which they are directly liable; thus, when they buy goods or services from local sources, the sellers who are the persons liable for the value added tax, are not precluded from including the VAT in their billings, in which case, the VAT merely becomes part of the cost of goods. (Refer to Phil. Acetylene vs. CIR, G.R. No. L-19707, Aug. 17, 1967) In other words, the local purchases by the Japanese contractors are neither exempt nor zero-rated. To be exempt or zero-rated, the purchases of goods or services shall be made by one who enjoys exemption from both direct, and/or indirect taxes passed on them by the seller (BIR Ruling No. 192-89 dated September 5, 1989). dctai Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV (Deputy Commissioner) (Legal and Enforcement Group)