Propmech Corporation

November 22, 2007 BIR RULING [DA-598-07] DA-14-2004 Sec 107 (A), NIRC; Sec 107-1 (b), R.R. 16-2005, R.R. 4-2007; Sec. 14 (b) (ii), GAA 2005 Propmech Corporation Marine Technology Centre, Intramuros, Manila Attention: Edward G. Antonio Managing Director Gentlemen : This refers to your letter, dated October 19, 2007, requesting for a ruling on the VAT liability of your corporation on its importation of ship equipment, machinery and spare parts as a government contractor under the Armed Forces of the Philippines (AFP) Modernization Program. It is represented that Propmech Corporation ( "Propmech" , for brevity), is a domestic corporation organized and existing under the laws of the Republic of the Philippines, with principal office and place of business at Marine Technology Centre, Intramuros, Manila and that Propmech is also a ship repair (Afloat) entity duly licensed by the Maritime Industry Authority (MARINA). It is further represented that Propmech was selected by the Department of National Defense (DND) as the contractor for the Patrol Killer Medium (PKM) Upgrade Project (Project Nr: AFPMP-PN-02-001-04). The Project is funded through the General Appropriations Act and the AFP Modernization Act Trust Fund and involves the overhaul, refurbishment, renovation, improvement, or alteration of the hull, machinery, equipment, outfits and components of the two PKM gunboats owned and operated by the Philippine Navy. Also, the Project entails the importation of equipment, machinery, spare parts and navigational systems for the PKMs as the main cost component of the upgrade. Under GCC 6.2 of the Special Conditions of Contract executed by Propmech with the government, the DND/AFP as the procuring entity, shall arrange for the payment of the Customs duties and taxes to be supplied under the Contract." On the other hand, Propmech as the contractor "shall arrange for the customs entry of such items, and pay the necessary fees such as, but not limited to Handling and Storage Fees. You also represent that the above assumption by DND/AFP of the duties and taxes for the imported items under the Contract is authorized and finds basis under Sec. 14 (b) (ii) of the General Appropriations Act (GAA) 2005. In this regard, you now request this Office to confirm your opinion that since the DND/AFP has obligated itself to assume the payment of taxes and customs duties that are imposable under the abovementioned contractual agreement with Propmech, the latter is clearly not liable for VAT on any imported items under such agreement. AECcTS In reply, please be informed that Section 107 (A) of the Tax Code of 1997, as amended by RA 9337, provides that: "(A) In General. There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: . . . The above provision must be read in connection with Sec. 4.107-1 (b) of Revenue Regulations (RR) No. 16-2005, as amended by RR 4-2007, which states that " The VAT on importation shall be paid by the importer prior to the release of such goods from customs custody ." From the foregoing provisions, it is evident that any importer of goods is subject to 10% (now 12%) VAT on such importation. In the present case, however, it appears that even if Propmech arranges for the customs entry of equipment, machinery, spare parts and navigational systems for the AFP/DND, it is the latter that is liable for VAT as the true importer of such goods. It appears that Propmech's role under GCC 6.2. of its agreement with the AFP/DND is merely that of a broker or middleman that would bring in the necessary equipment and other parts for the latter's gunboats. The nature of Propmech's role in the contract is further evidenced by its Bureau of Customs (BOC) Import Entry and Internal Revenue Declaration Form which indicates the name of the importer/consignee and its address as "AFP Finance Center, Armed Forces of the Philippines, Camp Gen. E. Aguinaldo, Quezon City, PHILIPPINES." In addition, it is also clear that the AFP/DND has assumed liability for VAT on the importation of the abovementioned equipment by virtue of GCC 6.2. of its agreement with Propmech. By its agreement, as the procuring entity, to arrange for the payment of the Customs duties and taxes to be supplied under the contract, there is no mistaking the AFP/DND's intention to subject itself to VAT liability on any importation of goods necessary for the repair, modification and upgrade of the Philippine Navy's gunboats under its modernization program. Moreover, such assumption of the VAT is legally provided for under Sec. 14 (b) (ii) of the General Appropriations Act (GAA) 2005, which provides: "Sec. 14. National Internal Revenue Taxes and Import Duties. The following are deemed automatically appropriated: . . . xxx xxx xxx "(b) Grant of tax expenditure subsidies to the following national government agencies: (i) the BTr for documentary stamp taxes on domestic securities issued; (ii) the DND and PNP on the importations of military hardwares, software, munitions, arms and equipment ; and (iii) the DOTC for the Metro Manila Line 3 System incurred starting FY 1997 in accordance with the provisions of the Build-Lease-Transfer Agreement executed thereon. xxx xxx xxx "The amounts pertaining to such taxes and duties covered by this section shall be considered as revenue and expenditure of the government. Implementation of this section shall be in accordance with the guidelines jointly issued by DOF and DBM." cCDAHE As the importation of machinery, spare parts and navigational systems for the Philippine Navy's gunboats constitutes importation of military equipment, it follows that the same is covered under tax expenditure subsidies for the DND and as such, are deemed automatically appropriated, in accordance with Sec. 14 (b) (ii) of the 2005 GAA. Accordingly, the VAT on the importation of machinery, spare parts and navigational systems for the Philippine Navy's gunboats should be imposed on the AFP/DND as the true importer/consignee of such goods and not Propmech, in accordance with Section 107 (A) of the same Tax Code. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group