Whether the Suppliers of Goods and Services for RIF Project Implemented by the DPWH are Not Subject to Value-Added Tax

January 28, 1992 BIR RULING NO. 042-92 101, 102 000-00 042-92 Department of Public Works and Highways Project Management Office Rural Infrastructure Fund Project Port Area, Manila Attention: Mr . Florante Soriquez Project Director Gentlemen : This refers to your letter dated October 11, 1991, in effect, requesting for a ruling that suppliers of goods and services for Rural Infrastructure Fund (RIF) project which is implemented by the Department of Public Works & Highways are not subject to value-added tax. It is represented that the Department of Public Works & Highways is the implementing agency that undertakes the construction and/or improvement of roads, bridges and ports under the Rural Infrastructure Fund Project financed by the US-Agency for International Development (A.I.D.) in accordance with the Project Grant Agreement No. 492-0420, entered into on September 28, 1987 between the Republic of the Philippines and the United States of America; that Article 3 of said Agreement provides that "to assist the Grantee to meet the costs of carrying out the Project A.I.D., pursuant to the Foreign Assistance Act No. 1961, as amended, agrees to grant the Grantee an amount in dollars which was variously adjusted through the years by way of amendment from the original amount of $51,190,000; that a ruling for the suppliers of goods and services for the RIF projects to be exempt from VAT is sought pursuant to BIR Ruling No. 513-88 which states that Economic Support Fund sourced from the proceeds of the RP-US Military Bases Agreements under existing bilateral agreements between the Government of the United States of America and the Government of the Philippines are exempt from any Government tax or imposition, and that billings by the seller of the goods or services who executed the projects funded by ESF funds shall not include the VAT provided that the seller of the said goods or services shall first apply for zero-rating, and under the tax exemption clause in the Agreement which states: Section B. 4. Taxation. "(a) This Agreement and the Grant will be free from any taxation or fees imposed under laws in effect in the territory of the Grantee." "(b) To the extent that (1) any contractor, including any consulting firm, any personnel of such contractor financed under the Grant, and any property or transactions relating to such contracts; and (2) any commodity procurement transaction financed under the Grant are not exempt from identifiable taxes, tariffs, duties, or other levies imposed under laws in effect in the territory of the Grantee, the Grantee will, as and to the extent provided in and pursuant to Project Implementation Letters, pay or reimburse the same with funds other than those provided under the Grant." In reply, please be informed that under Section 28(4), Article VI, of the 1987 Constitution of the Philippines, which became effective on February 2, 1987, no law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress. In view of said provision, since the adverted agreement between the Philippines and the United States involving RIF projects appears not to have been ratified, the aforesaid tax exemption provision is without force and effect. Moreover, paragraph (a) of the aforequoted provision is a tax exemption privilege that is applicable only to taxes for which the Grant itself is directly liable, e.g., income tax on interest earnings from banks deposits (BIR Ruling No. 125-86). On the other hand, paragraph (b) thereof should be understood as written which means that the suppliers of goods or services are not precluded from passing on the VAT on their sale of goods and services to RIF projects. If identifiable taxes are paid for by the proceeds of the Grant, the same are to be reimbursed from funds other than those provided under the Grant, which means from the counterpart funds of the Grantee. BIR Ruling No. 101/102-000-00-513-88 to the effect that billings by the seller of goods or services who executed the projects funded by ESF shall not include the value-added tax, is not applicable. Based on the foregoing considerations, your request in effect to consider the sale of goods or services for the Rural Infrastructure Fund (RIF) project as zero-rated or exempt from value-added tax cannot be granted for lack of legal basis. Very truly yours, (SGD.) JOSE U. ONG Commissioner of Internal Revenue