BIR Ruling [DA-211-04]

April 12, 2004 BIR RULING [DA-211-04] 57 & 108 S30-47-01 & VAT-87-89 Bureau of Fisheries and Aquatic Resources Department of Agriculture 2/F, Estuar Building 880 Quezon Avenue Quezon City Attention: Mr. Marciano T. Carreon III Project Director, FRMP Gentlemen : This refers to your letters dated July 5, 2001 and September 10, 2001 requesting for legal opinion on the following: A. The rules and regulations pertaining to the withholding tax deductions based on the following situations: 1. Non-government organizations and research institutions, not VAT-registered; 2. Non-government organizations and research institutions, registered as non-stock, non-profit taxpayer; and 3. Non-government organizations and research institutions, tax exempt based on the Tax Exemption Certificate submitted to your office. B. The percentage of VAT deductions to be imposed with regard to the type of contracts entered into by Bureau of Fisheries and Aquatic Resources-Fisheries Resource Management Project (BFAR-FRMP) on its various contractors 1. Mandala Agricultural Development Corporation in Association with Asian Institute of Journalism and Communication (MADECOR-AJIC) involving a Contract of Consulting Services for Planning, implementation and Management of the Information, Education and Communication Program of the Fisheries Resource Management Project; 2. Ugnayan Tulong sa Pilipinas Foundation (UGNAYAN) involving a Contract of Services for the conduct of Community Organizing in Calauag Bay, Quezon Province; and 3. Philippine Partnership for the Development of Human Resources in Rural Areas (PhiIDHRRA-Visayas) involving a Contract of Services for the conduct of Community Organizing in Sapian Bay, Visayas It is represented that the BFAR-FRMP and various non-government organizations (NGOs) entered into separate contracts of services involving research, community organizing and conduct resource and social assessment survey for priority bays in the country which are required in the implementation of the FRMP being executed through the Bureau of Fisheries and Aquatic Resources of the Department of Agriculture (BFAR). In 1999, BFAR and the Cooperative for Assistance and Relief Everywhere (CARE),a non-governmental organization and not VAT-registered, entered into and executed a Contract for Community Organizing in Carigara Bay to organize fishing communities and assist BFAR in developing their capabilities to plan and implement fishery resource management activities and income diversification projects. On March 18, 2000, the Department of Agriculture and the Mindanao State University and Naawan Foundation for Science and Technology Development, Inc. (MSU-NFSTDI),a VAT-registered, non-stock, non-profit corporation entered into and executed a Contract for Professional and Technical Services for the Resource and Social Assessment of Gingoog Bay. A Resource and Social Assessment (RSA) of Gingoog Bay is required in the implementation of the Fisheries Resource Management Project (FRMP) which is being executed through the BFAR of the Department of Agriculture. It is significant in order to generate an accurate and updated database on the condition of coastal resources of the Gingoog Bay and the socio-economic profile of its surrounding municipalities. The information gathered from the RSA will be used in formulating comprehensive management initiative that will reverse the trend of resource depletion in coastal waters. Also, in the same year, the BFAR of the Department of Agriculture and the Centre for Alternative Rural Technology, Inc. (CART),a non-stock, non-profit corporation entered into a Contract for Community Organizing in Gingoog Bay. CART is contracted for community organizing in the Municipality Talisayan, Gingoog City in Gingoog Bay. On January 21, 2000, a Contract of Consulting Services for Planning, Implementation and Management of the Information, Education and Communication Program of the Fisheries Resource Management Project was entered into and executed by and between the Department of Agriculture-Bureau of Fisheries and Aquatic Resources (DA-BFAR) and Mandala Agricultural Development Corporation in Association with Asian Institute of Journalism and Communication (MADECOR-AJIC),a non-VAT organization without a certificate of exemption. The contract involved consulting services necessary for the effective implementation of the FRMP, the scope of which shall be more appropriately defined by the Inception Report, which shall then supersede the Consulting Services. On August 24, 2000, BFAR and Ugnayan Tulong sa Pilipinas Foundation (UGNAYAN),a non-stock, non-profit organization with certificate of exemption from the Bureau of Internal Revenue (BIR),entered into and executed a Contract of Services for the Conduct of Community Organizing in Calauag Bay, Quezon Province. The contract involves organizing fishing communities and assisting them to develop their capabilities to plan and implement fishery resource management activities and income diversification projects. On December 13, 2000, BFAR and Philippine Partnership for the Development of Human Resources in Rural Areas (PhilDHRRA-Visayas),a VAT enterprise, tax exempt, donee-institution registered with the BIR, entered into and executed a Contract of Services for the Conduct of Community Organizing in Sapian Bay, Visayas. The contract involves organizing fishing communities and assisting them to develop their capabilities to plan and implement fishery resource management activities and income diversification projects. In reply, please be informed that a non-stock, non-profit corporation which has been issued a certificate of exemption under Section 30 of the 1997 Tax Code by the BIR is exempt from the payment of income tax on income received by it as such organization. However, it is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code on its income derived from any of its properties, real or personal, or any activity conducted for profit regardless of the disposition thereof ,which income should be returned for taxation. ( BIR Ruling No. S30-047-01 dated June 5, 2001 ) Section 2.57.2(B) of Revenue Regulations No. 2-98, as amended, imposes a creditable withholding tax on management and technical services of taxable juridical persons at the rate of 5% based on the gross professional fee. On the other hand, Section 108 of the 1997 Tax Code subjects to the value-added tax (VAT) the sale of services. In view of the foregoing, the NGOs and research institutions you contracted to perform research, community organizing and conduct resource and social assessment survey for priority bays in the country which are required in the implementation of the FRMP being executed through the Bureau of Fisheries and Aquatic Resources of the Department of Agriculture, are subject to the creditable withholding tax at the rate of 5% pursuant to Section 2.57.2(B) of Revenue Regulations No. 2-98, irrespective of whether or not the NGO has a certificate of tax exemption from the BIR. Moreover, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Section 106 to 108, pursuant to Section 105 of the 1997 Tax Code. Accordingly, the services rendered by the NGOs or research institutions are subject to the VAT pursuant to Section 108 of the 1997 Tax Code. ( VAT Ruling No. 087-89 dated March 7, 1989 ) However, if the NGO or research institution is a VAT-registered taxpayer, it is allowed to claim input tax in accordance with the provisions of Section 110 and 111 of the 1997 Tax Code. Finally, since VAT is an indirect tax, a VAT-registered taxpayer has the option to absorb the VAT and not pass it on to the buyer of the service or it may choose to pass it on to its buyer. Corollary thereto, an enterprise which is not VAT-registered cannot claim input tax. 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. ETHIDa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group