BIR Ruling [DA-250-99]

April 23, 1999 BIR RULING [DA-250-99] BIR/GTZ Tax Advisory Project Room 607, HRD-Project Assistance Bureau of Internal Revenue NOB Diliman, Quezon City Attention: Prof . Dr . Norbert Hennig Gentlemen : This refers to your letter dated April 8, 1999 requesting for a confirmatory ruling that the sale of goods and the services rendered to GTZ Projects and GTZ Projects Consultants, in connection with the Tax Advisory Projects, enjoy VAT zero-rating. cdll It is represented that GTZ is owned by the German Federal Government; that it is an enterprise with a development mission and is commissioned by the Government of the Federal Republic of Germany to undertake the planning and implementation of Technical Assistance Projects within the framework of Bilateral Cooperation between the Republic of the Philippines and the Federal of Germany; that the activities of GTZ are carried out on behalf of the German Federal Government on a non-profit basis and are governed by international agreements between the German Federal Government and the partner countries; that as of the present time, GTZ has a project with the Bureau of Internal Revenue (BIR); that within this project, GTZ is buying goods and services for the BIR-GTZ Tax Advisory Project; that under Articles 4 and 5 of the Bilateral Agreement of 1971 between the Governments of the Federal Republic and the Republic of the Philippines, the latter is mandated to levy no taxes or other fiscal charges on any emoluments paid from German Republic public funds to . . . consulting firms for services rendered within the framework of the present agreement; and that it is your opinion that your request finds legal basis under Section 4.102-2(b) of Rev. Regs. No. 7-95, implementing RA 7716, as amended by RA 8241 (now duly incorporated in RA 8424, otherwise known as the "Tax Reform Act of 1997). In reply, please be informed that pursuant to Sec. 4.102-2(b) of Rev. Regs. No 7-95, as amended by Revenue Regulations No. 6-97, implementing Republic Act No. 8241 which amended then Section 102(b) of the Tax Code, as amended (now Section 108(B)(3) of the Tax Code of 1997), which provides that "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 agreement to which the Philippines is a signatory effectively subjects the supply of such services to zero-percent (0%) rate ;" (Emphasis supplied.) services rendered to persons or entities whose exemption is clearly provided under international agreements, to which the Philippines is a signatory, are effectively subject to zero-percent (0%) VAT. llcd Also, Sec. 4.100-2(c) of the same Rev. Regs. No. 7-95, as amended provides that "SEC. 4.100-2. Zero-rated sales . A zero-rated sale by a VAT-registered persons, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations. "The following sales by VAT-registered persons shall be subject to 0%: "xxx xxx xxx. "(c) Sales to persons or entities whose exemption under special laws, e.g. RA No. 7227 duly registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority (CDA), RA No. 7916, Philippine Economic Zone Authority (PEZA), or international agreement, e.g. Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc. to which the Philippines is a signatory effectively subject such sales to zero percent (0%) rate." It must be noted that the Bilateral Agreement between the German Federal Government and the Government of the Philippines partakes of the nature of an international agreement, and is a valid source of tax exemption even without legislative concurrence. Thus, the restriction on the use of funds pursuant to the aforementioned Bilateral Agreement, i.e., the Government of the Philippines shall levy no taxes or other fiscal charges on any emolument paid from German public funds, is, in effect, a grant of tax exemption. Based on the foregoing, the GTZ as an enterprise with a development mission commissioned by the Government of the Federal Republic of Germany to undertake the planning and implementation of Technical Assistance Projects within the framework of Bilateral Cooperation between the Republic of the Philippines and the Federal Republic of Germany, is exempt from VAT. Thus, as a VAT exempt entity, the purchase of goods and services by GTZ in connection with the Project, is effectively subject to zero percent (0%) VAT. Likewise, the sale of goods and services to the GTZ Project Consultants whose emoluments are paid out of the fund, and in connection with the Tax Advisory Project, is effectively subject to zero percent (0%) VAT. (BIR Ruling No. 84-98 dated June 2, 1998) LLjur In both instances, the seller of goods and services, in order to avail of zero percent (0%) rate VAT, must be a VAT-registered person and must apply for VAT zero-rating. Failure to comply with the procedural condition of applying and obtaining approval for zero-rating, such sale shall instead be considered as exempt from VAT. In the light of the foregoing, GTZ Projects/Project Consultants may not legally be passed on with the value-added tax otherwise due from the supplier of goods and services vis-a-vis their payments to the latter in connection with the BIR-GTZ Tax Advisory Project. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. prll Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue