BIR Ruling [DA-422-03]

November 21, 2003 BIR RULING [DA-422-03] RR 2-98, as amended; Secs 106 (A) (2) (c) and 108 (B) (3) GADC-RP-CANADA BIR Ruling Nos. 111-97 & DA-501-99 Philippines-Canada Development Fund Unit 801 Jollibee Center Condominium Corporation San Miguel Avenue, Ortigas Center Pasig City Attention: Mr. Augusta B. Santos Deputy Director General, NEDA and Chairman, Board of Directors, PCDF Gentlemen : This refers to your letter dated August 21, 2002 requesting for the issuance of a Certificate of Tax Exemption covering all forms of taxes in favor of Philippines-Canada Development Fund (PCDF) considering that in a previous ruling, BIR Ruling No. DA-501-99 dated September 3, 1999, what was ruled upon was only the exemption of PCDF from the creditable withholding tax. BACKGROUND OF THE CASE As represented in the aforesaid BIR Ruling No. DA-501-99 dated September 3, 1999, the Development Fund is a grant assistance from the Canadian government to the Philippine government; that it is generated from the sale of grant commodities under the Commodity Assistance Program (CAP); that the Development Fund is utilized in funding various private and public sector projects jointly selected by the Canadian International Development Agency (CIDA) or the representative of the Canadian government, by the National Economic and Development Authority (NEDA) as representative of the Philippine government through a Joint Management Committee (JMC); and that under the Memorandum of Understanding (MOU) between the Government of the Republic of the Philippines and the Government of Canada concerning the Philippines-Canada Monetization Facility Project (PCMPD) particularly Section 4-02, Article IV thereof, to wit: IcCATD "Article IV CONTRIBUTION OF CANADA xxx xxx xxx "Section 4.02 "The Canadian contribution shall not be used by the PHILIPPINES to pay taxes, fees, customs duties or any other levies such as value-added tax charges imposed directly or indirectly by the PHILIPPINES on any goods, equipment, vehicles and services, purchased or acquired for, or related to, the execution of the project." Based on the above, the BIR opined that under Section 2.57.5 of Rev. Regs. No. 2-98, as amended, the withholding of creditable withholding tax prescribed therein shall not apply to income payments made to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special. The pertinent portion of the abovementioned BIR Ruling No. DA-501-99 held that "income payments to be made to the executing agency or implementing agents of the Canada-Philippines Development Counterpart Fund during the six-year period, which in all probability will be taken from the said restricted contribution of Canada, shall be exempt from the payment of the creditable withholding tax imposed under Revenue Regulations No. 2-98 implementing among others, Section 57(B) of the Tax Code of 1997, on goods, materials, equipment and services purchased or acquired out of the Project Fund (BIR Ruling No. 111-97) ." Pursuant to Resolution No. 35, which was ratified by the Senate on June 3, 1993, a General Agreement on Development Cooperation was entered into between the Government of the Philippines and Canada (GADC-RP-CANADA) on November 13, 1997. This Office held that said GADC is an international agreement. Thereafter, the above mentioned MOU was entered into between the Government of the Republic of the Philippines and the Government of Canada embodying the objectives and purposes of the GADC-RP-CANADA. BIR REPLY We reply as follows: Pursuant to Section 4.02, Article 10 of the MOU, the Development Fund shall not be used by the Philippines to pay taxes, fees, customs duties or any other levies such as value-added tax charges imposed directly or indirectly by the Philippines on any goods, equipment, vehicles and services purchased or acquired for, or related to, the execution of the project. As previously ruled, this restriction on the use of the fund to pay taxes, fees, customs duties or any other levies is, in effect, a grant of tax exemption. Further, considering that the MOU is a written statement summarizing the terms of the GADC between the Philippine government and the Canadian government, which GADC was previously ratified by the Senate pursuant to Resolution No. 35 adopted on June 3, 1993, the same is considered as an international agreement, hence, forms part of the law of the land ( i.e. , the Philippines). Such being the case, this Office hereby rules that any income payment to the supplier or seller of any goods, equipment, vehicles and services purchased or acquired for, or related to, the execution of the project, which will be taken out of the Development Fund managed by the PCDF, shall be exempt from all taxes such as, but not limited to, income tax, value-added tax or percentage tax imposed under the National Internal Revenue Code. Consequently, and as previously held in BIR Ruling No. DA-501-99, such income payment shall also be exempt from the creditable withholding tax on income imposed under Rev. Regs. No. 2-98, as amended. CDHSac Moreover, in the case of VAT, the sale of goods or supply of services to PCDF shall effectively subject such sale to zero percent (0%) rate pursuant to Sections 106(A)(2)(c) and 108(B)(3) of the Tax Code of 1997. For this purpose, the seller of goods or supplier of services is required to secure prior approval through an application for zero rating; otherwise, the transaction shall only be considered as exempt from VAT. (VAT Ruling No. 071-02 dated October 22, 2002) Finally, inasmuch as we do not issue a formal Certificate of Tax Exemption, this ruling shall serve as confirmation of PCDF's claim of exemption under the aforementioned GADC. 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. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection