TESDA's Liability for VAT on Locally-Procured Materials and Equipment for the Construction of the NVTDC

April 13, 1998 BIR RULING NO. 043-98 106-71-97-43-98 Technical Education and Skills Development Authority TESDA Complex East Service Road South Superhighway Taguig, Metro Manila Attention: Dr . Jose D . Lacson Director General Gentlemen : This refers to your letter dated October 3, 1997 requesting, in effect, as to whether or not the Technical Education and Skills Development Authority (TESDA), as the government agency-recipient of a grant-aid from the Government of Japan, can shoulder the Value-Added Tax on the locally-procured materials and equipment for the construction of the National Vocational Training and Development Center. LLpr It is represented that the National Vocational Training and Development Center for Women, a grant-aid from the Government of Japan, aims to contribute to the improvement of the socio-economic status of women by providing vocational training and conducting research and advocacy with the assistance of NGO concerning women's capabilities development and gender responsive programmes; that the Center is envisioned to become a model facility in the field of vocational training and development for women in the Asia-Pacific Region; that the Exchange of Notes for the Project was signed by the Ambassador Extraordinary & Plenipotentiary of Japan and our Secretary of Foreign Affairs on July 1, 1996; that part of the Philippine Government commitment (thru TESDA) as embodied in the Exchange of Notes and the Basic Design Study verified by the Japan International Cooperation Agency (JICA) is " to ensure prompt unloading , tax exemption , custom clearance at the port of disembarkation in Manila and prompt internal transportation therein of the materials and equipment for the Project purchased under the grant-aid and to bear all expenses , other than those covered by the Grant , necessary for the execution of the Project "; that the concerning works in the construction of the building is completed and that the Center, fully equipped with state-of-the-art and latest high-technology machinery and equipment is to be turned-over to the Philippine Government supposedly on March 13, 1998. In reply, please be informed that we have taken note of the fact that paragraph (6)(1)(d) and (g) of the Exchange of Notes signed by our Secretary of Foreign Affairs Domingo L. Siazon, Jr. dated July 1, 1996 provides as follows: "(6).(1) The Government of the Republic of the Philippines will take necessary measures: "xxx xxx xxx "(d) to exempt Japanese nationals from customs duties, internal taxes and other fiscal levies which may be imposed in the Republic of the Philippines with respect to the supply of the products and services under the Verified Contracts; "xxx xxx xxx "(g) to bear all the expenses, other than those covered by the Grant, necessary for the execution of the Project." prLL The aforequoted provision of the Exchange of Notes between our Secretary of Foreign Affairs and the Ambassador Extraordinary & Plenipotentiary of Japan to the Republic of the Philippines is actually not a grant of tax exemption privilege to the Japanese nationals who may be involved in the supply of products and services in the Project since it simply states that the Government of the Republic of the Philippines will ensure that the taxes that may be imposed by the Philippine Government on the said supply of goods and services shall be exempt from internal revenue taxes. In other words, it is incumbent upon the Government of the Philippines to see to it that the Japanese nationals who may be involved in the Project shall not pay whatever internal revenue taxes that the latter may be liable to for providing the supply of goods or services for the Project. Thus, there is really no tax exemption to speak of because the said taxes referred to may be borne by the Philippine Government in consideration for the economic cooperation extended by the Japanese Government with a view to strengthening friendly and cooperative relations. Hence, it cannot be considered as a violation of the Constitutional prohibition against grants of tax exemptions without the concurrence of the majority of the members of the Congress (Sec. 28(4), Art. VI, 1987 Philippine Constitution). In view thereof, this Office is of the option that since the Philippine Government obligated itself under the Exchange of Notes between our country and the Japanese Government dated July 1, 1996 to make the necessary measures to exempt the Japanese nationals who may be involved in the said Project from internal revenue taxes which may be imposed by the Republic of the Philippines with respect to the supply of products and services, Mitsubishi Corporation, which must necessarily be a corporation organized and existing under the laws of Japan , shall be exempt from the payment of the 10% VAT on the supply of goods, such as the materials and equipment used for the construction of the National Vocational Training and Development Center for Women, imposed under Sections 106 of the Tax Code of 1997 and considering further that paragraph (6)(1)(g) of the subject Exchange of Notes specifically provides that the Government of the Philippines shall " bear all the expenses other than those covered by the Grant necessary for the execution of the Project ." cdlex In relation to this, it is noteworthy to state that Section 12 of Republic Act No. 8174, otherwise known as the "General Appropriations Act of 1996" provides as follows: " National Internal Revenue Taxes and Import Duties of National and Local Government Agencies . . . National internal revenue taxes and import duties payable by national government agencies to the National Government, as well as customs duties and taxes for the importation of equipment by local government units, are deemed automatically appropriated . The amount pertaining to such taxes and duties shall be considered as revenue and expenditure of the government ." Consequently, the Philippine Government (thru TESDA) will bear the payment of the value-added tax on the supply of materials and equipment by Mitsubishi Corporation used for the said Project and the said taxes are deemed automatically appropriated. 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 and/or any of the conditions imposed in this letter are not complied with, then this ruling shall be considered null and void from the date of issue. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue