Propmech Corporation

March 10, 2009 BIR RULING [DA-(VAT-030) 143-09] DA-598-2007; Sec. 107 (A); NIRC; Sec. 107-1 (b); RR 16-2005; RR 4-2007; Sec. 14 (b) (ii), GAA 2005 Propmech Corporation Marine Technology Centre, Intramuros, Manila Attention: Edward G. Antonio Office of the Managing Director Gentlemen : This refers to your letter, dated February 18, 2009, requesting confirmation that Propmech Corporation is not liable to pay VAT on the importation of three (3) Multi-Purpose Attack Crafts (MPAC), including its accessories, for the Multi Purpose Attack Craft Acquisition Project under the Armed Forces of the Philippines Modernization Program. It is represented that Propmech Corporation ( "Propmech", for brevity), with TIN 000-841-565-000 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. It is further represented that, on June 17, 2008, Propmech, in partnership with Lung Teh Shipbuilding Corporation Limited (Taiwan), was selected as the contractor by the Department of National Defense (DND/AFP), as the procuring entity, for the MPAC Acquisition Project (Project) known as Project Nr: AFPMP-PN-02-002-003; that a copy of Propmech's SEC and BIR Registration certificates are enclosed with the request. The Project is funded by the Government of the Republic of the Philippines through the General Appropriations Act, particularly the AFP Modernization Act Trust Fund and DOE-Transferred Fund, that entails the importation of specialized Multi-Purpose Attack Crafts which are not locally available, for use by the Armed Forces of the Philippines. The items to be imported are more specifically described in the enclosed technical specifications that are attached as Annex "C" in the request. 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 that 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. That the assumption by DND/AFP of the duties and taxes for the imported military hardware and equipment under the Contract is authorized by Sec. 14 (b) (ii) of Republic Act No. 9401 or the General Appropriations Act (GAA) 2007. 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. In reply, please be informed that Section 107 (A) of the Tax Code of 1997, as amended by R.A. 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 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 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 attack crafts. HDaACI 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 Multi-Purpose Attack Crafts 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 the General Appropriations Act (GAA) 2007, 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." CTHaSD As the importation of Multi-Purpose Attack Crafts 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 2007 GAA. Accordingly, the VAT on the importation of Multi-Purpose Attack Crafts 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. aCTHEA Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group