PROPMECH Corporation

February 8, 2010 BIR RULING [DA-(VAT-007) 025-10] DA598-07 PROPMECH Corporation Marine Technology Center Building Aduana cor. Arzobispo Streets Intramuros, Manila Attention: Mr. Edward G. Antonio Managing Director for Corporate Affairs Gentlemen : This refers to your letter dated December 28, 2009 stating that on November 25, 2008, Propmech Corporation (Propmech) a domestic corporation and taxpayer was selected as the contractor by the Department of National Defense (DND)/Armed Forces of the Philippines (AFP), as the procuring entity, for the Patrol Killer Medium (ROK) Upgrade Project (Project Nr: AFPMP-PN-01-07-039) or the Project; that the Project is funded by the Government of the Philippines through the General Appropriations Act, particularly the AFP Modernization Act Trust Fund, which entails the importation of specialized military hardware and equipment that are not locally available as the main cost component of the upgrade; that also, it involves the overhaul, refurbishment, renovation, improvement, or alteration of the hull, machinery, equipment, outfits and components of the two Patrol Killer Medium (ROK) gunboats owned and operated by the Philippine Navy; that Clause 6.2 of the Special Conditions of Contract (SCC) provides that "(f)or purposes of the Contract, DDU and other trade terms used to describe the obligations of the parties shall have the meanings assigned to them by the current edition of INCOTERMS published by the International Chamber of Commerce, Paris; that the Delivery terms of the Contract shall be as follows: "For foreign Suppliers, (t)he delivery terms applicable to the Contract are DDU, Fort San Felipe, Cavite City, Philippines in accordance with INCOTERMS." Notably, the Project is a non-cash transaction that is payable through an irrevocable letter of credit per Clause 9.1 of the SCC. that under INCOTERMS 2000 (which is the latest version), 'DDU' (Delivered Duty Unpaid) means the seller is responsible for making the goods available to the buyer at a named place of destination but not cleared for import, i.e., 'duty' (which term includes the payment of customs duties, taxes and other charges) is not paid by the seller or supplier. Such 'duty' has to be borne by the buyer as well as any costs and risks caused by his failure to clear the goods for import in time; that in the foregoing instance, DND/AFP and Propmech clearly agreed in the Contract that the delivery term 'DDU' as defined and understood in the context of INCOTERMS 2000 shall be followed: As such, Propmech is only accountable for making the imported military hardware and equipment available at a named place of destination in the Contract, but NOT customs duties and taxes such as VAT, which are assumed by DND/AFP in accordance with the DDU delivery term under the Contract; that if it is otherwise, the appropriate delivery term is DDP or Delivery Duty Paid which means that the obligation of the seller or supplier is not only to clear the goods for import but also pay duties and taxes as a consequence thereof; that consistent with the delivery term DDU under INTERCOMS 2000 and to give effect to the provisions of the Contract adopting said delivery term, all import documents, including all receipts/invoices, shall expressly indicate the DND/AFP as the importer/consignee of the military hardware and equipment to be imported thereby clearly establishing the latter's liability for duties and taxes such as VAT under the Contract; and that the assumption by DND/AFP of the duties and taxes for the imported military hardware and equipment under the Contract is authorized by Section 14 (b) (ii) of Republic Act (RA) No. 9498 or the General Appropriations Act (GAA) 2008, which reads: ATICcS "Sec. 14. National Internal Revenue Taxes and Import Duties. The following are deemed automatically appropriated: xxx xxx xxx (b) Non-cash transactions of the following national government agencies: (i) the BTr for documentary stamp taxes on domestic securities issued, including issuances for foreign securities in prior years until December 31, 2007; (ii) the DND and PNP on the importations of military hardwares, software, munitions, arms and equipment; (iii) Bureau of Fire Protection on the importation of fire fighting equipment; (iv) Bureau of Fire Protection on the importation of fire fighting equipment rescue equipment and personal protective gears; (v) the DOTC for the Metro Rail Transit Line 3 System incurred starting FY 1997 in accordance with the provisions of the Build-Lease-Transfer Agreement executed thereon; and (vi) other tax obligations assumed by the national government pursuant to a valid build-operate and transfer agreement or any of its variants. 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." Based on the foregoing representations, you now request for confirmation of your opinion that Propmech is not liable to pay the VAT on the importation of specialized military hardware and equipment to be used for the upgrade of two (2) Patrol Killer Medium (ROK) gunboats under the AFP Modernization Program's Patrol Killer Medium (ROK) Upgrade Project. In reply thereto, 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%) [now 12%] 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: SEcTHA xxx xxx xxx" 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 specialized military hardware and equipment to be used for the upgrade of two (2) ROK gunboats 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 the Contract 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 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. aSACED 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." As the importation of specialized military hardware and equipment 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 specialized military hardware and equipment 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, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal & Inspection Group