Propmech Corporation

June 21, 2010 BIR RULING [DA-(VAT-015) 105-10] Section 107 (A) NIRC; Sec. 4.107-1 (b) of RR No. 16-2005; RR 4-2007; Sec. 14 (b) (ii) GAA of 2008; BIR Ruling No. DA-598-2007 Propmech Corporation Marine Technology Center Building Aduana cor. Arzobispo Sts., Intramuros Manila Attention: Mr. Edward G. Antonio Managing Director for Corporate Affairs Gentlemen : This refers to your letter dated May 24, 2010 requesting for a confirmation that importation of military hardware and equipment to be used for the development of a Landing Craft Unit ("LCU") under the Armed Forces of the Philippines (AFP) Modernization Program is exempt from value-added tax. cDTSHE It is represented that Propmech Corporation (PROPMECH) with TIN 000-841-565-000, a 100% domestic corporation was selected as the contractor by the Department of National Defense ("DND/AFP"), as the procuring entity, for the LCU Acquisition Project (Project Nr: AFPMP-PN-02-07-014) or the "Project"; that the Project is procured through Republic Act No. 9184, otherwise known as the Government Procurement Act and is funded through the General Appropriations Act, particularly the AFP Modernization Act Trust Fund, which involves the development of an LCU (design, install and build) requiring the importation of military hardware and equipment as the main cost component of the Project; that the items to be imported are more specifically described in the enclosed list attached as Annex "D". In the foregoing instance, Propmech as a domestic contractor under the Contract is obligated to deliver the imported items DDU in the development of an LCU. As such, Propmech is only accountable for making the imported military hardware and equipment available at the named place of destination in the Contract, but not customs duties and taxes such as VAT. 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 to pay duties and taxes as a consequence thereof. Consistent with the delivery term DDU under INCOTERMS 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 in support of your request, the following documents were submitted: 1. Notice of Award issued by the DND as Annex "A"; 2. Articles of Incorporation of PROPMECH Corporation as Annex "B"; 3. Propmech Corporation BIR Certificate of Registration as Annex "C"; 4. Shortlist of Materials, Machineries and Equipment as Annex "D"; 5. Contract Agreement executed by and between AFP and Propmech Corporation as Annex "E"; In reply, please be informed that Section 107 (A) of the Tax Code of 1997, as amended by RA 9337, provides that: TAESDH "(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 12% VAT on such importation. In the present case, it is clear that the AFP/DND, is liable for VAT as the true importer of such goods. It appears that Propmech's role under GCC Clause 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 military hardware and equipment. 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 Clause 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 military hardware and equipment for the modification and upgrade of the Armed Forces of the Philippines under the Armed Forces of the Philippines Modernization Program. Moreover, such assumption of the VAT is legally provided for under Sec. 14 (b) (ii) of R.A. No. 9498 or the General Appropriations Act (GAA) 2008, which provides: "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; (ii) the DND and PNP on the importations of military hardwares, software, munitions, arms and equipment ; (iii) . . . 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." EDISTc As the importation of military hardware and equipment 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 2008 GAA. (BIR Ruling No. DA-598-2007 dated November 11, 2007) Accordingly, the VAT on the importation of military hardware and equipment and its accessories 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