SGV & Co.

October 8, 2009 BIR RULING [DA-(VAT-089) 585-09] 106 (A) (2) (c); 108 (B) (3) 014-99; DA-392-06; 136-97; DA-024-05; DA-(C-034)-126-08 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Veronica A. Santos Tax Division Gentlemen : This refers to your letter dated December 5, 2008 requesting for a ruling on the value-added tax (VAT) implications of the sale by local suppliers of goods and services to your client, the International Committee of the Red Cross (ICRC). Specifically, you wish to secure a confirmation that such sales are subject to VAT at zero-percent rate ( i.e. , it is an effectively zero-rated transaction) pursuant to Sec. 106 (A) (2) (c) and Sec. 108 (B) (3) of the Tax Code of 1997, as amended or in the event that the supplier is not VAT-registered, then such sale is an exempt transaction pursuant to Section 109 (1) (K) of the same Tax Code. ASIETa It appears that ICRC, founded in Geneva in 1863 and formally recognized in the 1949 Geneva Convention and by the International Conferences of the Red Cross is an independent humanitarian organization. It is one of the components of the International Red Cross and Red Crescent Movement. The Philippines is a signatory to the 1949 Geneva Conventions, i.e. , the Convention for the Amelioration of the Condition of the Wounded and Sick in Armed Forces in the Field (Convention I); the Convention for the Amelioration of the Condition of the Wounded, Sick, and Shipwrecked Members of Armed Forces at Sea (Convention II); the Convention Relative to the Treatment of Prisoners of War (Convention III); and the Convention Relative to the Protection of Civilian Persons in Time of War (Convention IV); and the Additional Protocols thereto, i.e. , the Protocol Relating to the Protection of Victims of International Armed Conflicts (Protocol I); the Protocol relating to the Protection of Victims of Non-International Armed Conflicts (Protocol II); and the Protocol Relating to the Adoption of Additional Distinctive Emblems (Protocol III). The 1949 Geneva Conventions and their Additional Protocols are international treaties that have been acceded to by 194 states and that enjoy universal acceptance. Convention I specifically recognizes that the ICRC is an impartial humanitarian body that may undertake activities for the protection of the wounded and the sick and that can send representatives to a meeting of parties to a conflict as to the application or interpretation of the Convention. The ICRC Statutes provide that the role of the ICRC is as follows: (a) to maintain and disseminate the Fundamental Principles of the Movement, namely humanity, impartiality, neutrality, independence, volunteer service, unity and universality; (b) to recognize any newly established or reconstituted National Society which fulfills the conditions for recognition set out in the Statutes of the movement, and to notify other National Societies of such recognition; (c) to undertake the tasks incumbent upon it under the Geneva Conventions, to work for the faithful application of international humanitarian law applicable in armed conflicts and to take cognizance of any complaints based on alleged breaches of that law; (d) to endeavour at all times as a neutral institution whose humanitarian work is carried out particularly in time of international and other armed conflicts or internal strife to ensure the protection of and assistance to military and civilian victims of such events and of their direct results; (e) to ensure the operation of the Central Tracing Agency as provided in the Geneva Conventions; (f) to contribute, in anticipation of armed conflicts, to the training of medical personnel and the preparation of medical equipment, in cooperation with the National Societies, the military and civilian medical services and other competent authorities; (g) to work for the understanding and dissemination of knowledge of international humanitarian law applicable in armed conflicts and to prepare any development thereof; (h) to carry out mandates entrusted to it by the International Conference of the Red Cross and Red Crescent. The ICRC executed a Headquarters Agreement with the Government of the Republic of the Philippines on April 30, 1985 and Article 2 of the aforesaid Agreement provides for the exemption of the ICRC from all regional, municipal, provincial, and national taxes. "Article 2 Property and Funds a. The ICRC Delegation shall be exempt from all regional, municipal, provincial or national dues and taxes . The ICRC Delegation shall not, however, claim exemption for fees which are levied for public utility services." While the ICRC is to be distinguished from the Philippine National Red Cross (PNRC), they both have obligations under the 1949 Geneva Conventions. The PNRC is a member of the International Red Cross and the Red Crescent Movement. It was created by Republic Act (R.A.) No. 95, as amended by R.A. Nos. 855 and 6373 and Presidential Decree (P.D.) No. 1264 "to be the voluntary organization officially designated to assist the Republic of the Philippines in discharging the obligations set forth in the Geneva Conventions and to perform such other duties as are inherent upon a National Red Cross Society". [P.D. No. 1264, Sec. 1] P.D. No. 1264 grants tax exemptions to PNRC. Sec. 4 (a) specifically provides that in furtherance of its purposes the PNRC " shall be exempt from payment of all duties, taxes, fees, and other charges of all kinds on all importations and purchases for its exclusive use, on donations for its disaster relief work and other Red Cross services, and in its benefits and fund raising drives all provisions of law to the contrary notwithstanding." You now request on behalf of ICRC for a confirmation of opinion that its purchases of goods and services from local suppliers are either exempt from VAT if the seller is not VAT-registered, or subject to VAT at the rate of zero percent (0%) if the seller is VAT registered pursuant to Article 2 of the Headquarters Agreement between the Government of the Republic of the Philippines and the ICRC. TCADEc In reply, please be informed that the 1997 Tax Code, as amended by R.A. 9337 recognizes that sales which are tax-exempt under international agreements to which the Philippines is a signatory are either exempt from VAT (if the seller is not VAT-registered) or subject to VAT at the zero percent rate (if the seller is VAT-registered). Pursuant to Secs. 106 (A) (2) (c) and 108 (B) (3) of the same Tax Code provide that sale of goods and services to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory is subject to VAT at the rate of 0%: "Sec. 106. Value-Added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax. . . . (1) . . . (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) . . . (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate." "Sec. 108. Value Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. . . . (B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: (1) . . . (2) . . . (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate." Sec. 109 (K) also provides that a transaction is exempt from VAT if the seller is not VAT-registered and if the transaction is exempt pursuant to an international agreement to which the Philippines is a signatory or pursuant to a special law, viz. : "Sec. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: (A) . . . (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529." ASCTac The international agreement which provides for the ICRC's exemption from Philippine taxes is the Headquarters Agreement and the Philippines is a signatory to this Agreement. A comparison of the tax exemption of the ICRC and PNRC is useful because in a very recent ruling, this Office adverted to the PNRC's obligations under the Geneva Conventions and to its international character, as further basis for its tax exemption. In BIR Ruling No. DA-(C-034)-126-08 dated August 8, 2008, the BIR specifically held that: "As to the issue of whether the PNRC should be considered as an international organization as a further basis for exemption from the payment of capital gains tax, this Office rules that while the PNRC is not an international organization as contemplated by law that would warrant its exemption from tax (BIR Ruling DA-128-06), we also recognize the fact that the PNRC is imbued with the character of an international organization based on the purposes for which it was created. "The PNRC was created by law (Republic Act No. 95 and Presidential Decree No. 1264) which removes it from the ambit of an international organization. However, the PNRC was created pursuant to the Philippines' obligations under the Geneva Red Cross Convention of 1947 as "a body corporate and politic to be the voluntary organization officially designated to assist the Republic of the Philippines in discharging the obligations set forth in the Geneva Conventions and to perform such other duties as are inherent upon a National Red Cross Society (Section 1, P.D. 1964)." "Since the PNRC as formed to assist the Philippine Government in discharging the latter's obligations under the Geneva Conventions, it can be gainsaid that the PNRC is an instrumentality of the national government enjoying tax exemption privileges because of its charter, and because it is imbued with an international character, while not completely an international organization. Thus, as an instrumentality imbued with the character of an international organization, it is exempt from capital gains tax.'' In BIR Ruling No. DA-392-06 dated June 26, 2006 and BIR Ruling No. 014-99 dated February 1, 1999, the BIR revoked earlier rulings which held that sales to PNRC are neither VAT exempt nor subject to VAT at 0% rate. Thus, in BIR Ruling No. DA-392-06, the BIR held that "the withdrawal of all tax and duty incentives given to private entities refers to private entities which are engaged in trade or business or an economic activity" and that "it does not therefore apply to PNRC" so that: (1) PNRC is exempt from the payment of VAT on its importation of goods and (2) sales to PNRC of goods and services by local suppliers are also exempt from VAT. The BIR thereby revoked BIR Ruling No. 026-96 dated February 27, 1996 and BIR Ruling No. 064-98 dated May 21, 1998. The language employed by the Headquarters Agreement to provide for the exemption of the ICRC from all Philippine taxes is similar to the language employed in P.D. 1264 to provide for the tax exemption of PNRC, and the BIR in the foregoing rulings has held that such language includes tax exemption for PNRC's local purchases of goods and services. This Office has gone down a similar path in interpreting the tax exemption of the Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEARCA) in BIR Ruling No. DA-024-05 dated January 21, 2005, viz. : "Under Presidential Decree No. 1171, SEARCA enjoys the comprehensive tax exemption privilege which extends to goods imported and owned by the SEARCA. This exemption was granted in view of the fact that SEARCA continues to articulate Philippine Commitment to regional cooperation among Southeast Asian and other countries in Asia and elsewhere through education, science and culture. In the context of this commitment, the broad tax exemption privileges granted under Republic Act No. 6450 and Presidential Decree No. 1171 shall not be construed as being limited only to the taxes for which SEARCA is directly liable, considering that under the aforementioned Section 106(A)(2)(c) and 108(B)(3) of the Tax Code of 1997, sales of goods and services respectively, to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory are effectively subject to zero-rating. AacSTE The purpose of this provision of the Tax Code is to maintain and recognize such exemption enjoyed by such entities as the SEARCA by permitting sales by domestic suppliers to such entities to be zero-rated. In view of the foregoing, sales to SEARCA by a VAT-registered person are effectively zero-rated." . . . The BIR has recognized that each of the following transactions are either exempt from VAT or subject to VAT at 0% rate pursuant to an international agreement to which the Philippines is a signatory owing to the broad language of the exemption provided for in the agreement and despite the absence of distinction made between direct and indirect taxes a. sale of motor vehicles to the United Nations Children's Fund (UNICEF) [DA ITAD Ruling No. 155-06 dated December 13, 2006]. Article III Section 10 of the Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations provides that "Where the specialized agencies will not, as a general rule, claim exemption from excise duties and from taxes on the sale of movable and immovable property which form part of the price to be paid, nevertheless when the specialized agencies are making important purchases for official use of property on which such duties and taxes have been charged or are chargeable, States parties to the Convention will, whenever possible, make appropriate administrative arrangements for the remission or return of the amount of duty or tax." b. sale of motor vehicles to the German Embassy [DA ITAD Ruling No. 137-06 dated November 7, 2006] The Agreement between the Government of the Federal Republic of Germany and the Government of the Republic of the Philippines Concerning Technical Cooperation executed on September 7, 1971 provides that "4. The Government of the Republic of the Philippines shall make the following contributions: It shall: (a) exempt the material and motor vehicles supplied for the Office from taxes, licenses, harbour dues, import and export duties and other public charges, as well as storage fees, and ensure that such material is cleared by customs without delay. The aforementioned transactions shall, with regard to value added tax (VAT), also apply to material and services (including consulting services) procured in the Republic of the Philippines, as well as to the renting of office premises and accommodation for seconded experts." c. sale of goods and services in the Philippines to the Food and Agriculture Organization of the United Nations (FAO-UN) [DA ITAD Ruling No. 107-06 dated September 15, 2006] The Exchange of Letters constituting the Agreement between the Government of the Republic of the Philippines and FAO, in relation to Article III Section 10 of the Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations provides that: "To the extent that it is not already bound to do so, the Government agrees to apply to the Organization, its staff, funds, property, and assets, the provisions of the Convention on the Privileges and Immunities of the Specialized Agencies. The FAO representative shall be accorded the treatment provided for in Section 21 of the said Convention. The Government also agrees to grant FAO, and to the FAO representative and his staff, privileges and immunities not less favorable than those granted to a representative of any other specialized agency or similar United Nations body in the Philippines." ACETSa d. sale of services to the United States Agency for International Development (USAID) [DA ITAD Ruling No. 098-06 dated August 25, 2006] The BIR held that the VAT exemption privilege of diplomatic missions in the Philippines and their personnel is made to rest on the principle of reciprocity: "Nonetheless, although selectively, the VAT exemption privilege of diplomatic missions in the Philippines and their personnel is made to rest on the principle of reciprocity. In BIR Ruling No. 246-92 dated September 3, 1992, the precursor ruling that cited reciprocity as a basis for the grant of VAT exemption to diplomatic missions in the Philippines and their personnel, this Bureau ruled that the French Embassy's purchase of a motor vehicle is exempt from VAT and from ad valorem tax on the basis of reciprocity, if the French Embassy can submit to the Commissioner of Internal Revenue (or his duly authorized representative) a copy of a special legislation or an international agreement that shows that the French government allows similar tax exemption to the Philippine Embassy in France and its personnel on their purchase of goods and services in France. The same requirement is invoked in the predecessor ruling, BIR Ruling No. 206-93 dated May 11, 1993, where this Bureau ruled that the British Embassy's purchase of a motor vehicle is exempt from VAT and ad valorem tax on the basis of reciprocity. Based on the British Embassy's letter to the Commissioner of Internal Revenue dated April 7, 1993, the British government allows similar tax exemption to the Philippine Embassy in the United Kingdom and its personnel on their purchase of goods and services in the United Kingdom. From then on, the determination of the existence of a special legislation or an international agreement that allows similar tax exemption to Philippine Embassies abroad and their personnel now lies with the Office of Protocol and State Visits of the Department of Foreign Affairs (DFA) who furnishes this Bureau, from to time, of an updated list of diplomatic missions in the Philippines which may enjoy VAT exemption on the basis of reciprocity. As far as the USAID is concerned, inasmuch as it discharges the responsibilities of the United States government to the Philippine government under the 1951 Economic and Technical Cooperation Agreement on the provision of economic and technical assistance in the Philippines, the USAID constitutes as part of the Special Technical and Economic Mission mentioned in the Agreement. As it is, the USAID is an agency of the United States government and is a part of and working dependently with the United States Embassy in the Philippines. Hence, pursuant to Article IV of the Agreement, the Philippine government will accord to the USAID and its personnel of comparable diplomatic rank those privileges and immunities presently enjoyed by the United States Embassy in the Philippines and its (Embassy's) personnel, including VAT exemption on the purchase of goods and services in the Philippines. Thus, on the basis of reciprocity as has always been reiterated in all VAT exemption rulings, VECs and VEICs issued by this Bureau to the United States Embassy and its personnel, this Office extends the same exemption to the USAID and its personnel of comparable diplomatic rank. Thus, this Office is of the opinion and so holds that the service fees to be paid by the USAID to Tetra Tech (composed of project costs, fixed fees, and possible performance/award fees) in connection with the IEMP, CRM, and FISH Projects funded by the USAID are exempt from VAT. [BIR Ruling No. DA-ITAD 16-05 dated February 24, 2005] HETDAC e. sale of motor vehicles to the International Finance Corporation [DA ITAD Ruling No. 090-06 (August 14, 2006)] Section 9 (a) Article VI of the Articles of Agreement of the International Finance Corporation provides that: "Article VI Status, Immunities, and Privileges xxx xxx xxx Section 9. Immunities from Taxation. (a) The Corporation, its assets, property, income and its operations and transactions authorized by this Agreement, shall be immune from all taxation and from all customs duties. The Corporation shall also be immune from liability for the collection or payment of any tax or duty." f. sale of motorcycles to the United Nations Fund for Population Activities (UNFPA) [DA ITAD Ruling No. 052-06 dated May 11, 2006]. Pursuant to Article III Section 10 of the Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations, important purchases of goods and services in the Philippines for the official use of the specialized agencies of the UN are accorded exemption from indirect taxes such as VAT. g. Sale of services to the Philippine Department of Finance for the Philippine Tax Computerization Project of the BIR under a Loan Assistance Program of the World Bank. [BIR Ruling No. 136-97 dated December 11, 1997). Paragraph 1.9 of the Consultancy Contract between the DOF and the Philippine contractor provides: "1.9 Taxes and Duties "The client warrants that the Consultant and the Foreign Personnel shall be exempt from any taxes, duties, levies, and other impositions imposed, under the applicable law, on the Consultant and the Foreign Personnel in respect of: (a) Any payments whatsoever made to the Consultant or the Foreign Personnel (other than the national of the Government or permanent residents of the Government' country) in connection with the carrying out of the service." TAEDcS Accordingly, we hereby confirm your opinion that purchases made by ICRC are subject to VAT at 0% rate pursuant to Secs. 106 (A) (2) (c) and 108 (B) (3) of the Tax Code of 1997, as amended by R.A. 9337 or in the event that the supplier is not VAT-registered, then the purchases made is an exempt transaction pursuant to Sec. 109 (1) (K) of the same Tax Code, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service