Sale of Goods and Services to a Government Entity by a Domestic Corporation, Subject to VAT

May 21, 1998 BIR RULING NO. 060-98 99, 100 (c) 70-96 132-96 060-98 Punongbayan & Araullo 6th Floor, Vernida IV Bldg. Alfaro St., Salcedo Village 1200 Makati City Attention: Atty . Vic C . Mamalateo Tax Partner Gentlemen : This refers to your letter dated June 25, 1997 requesting on behalf of your client, Unisys Public Sector Services Corporation, for a ruling that the sale of goods and services to a government entity by a domestic corporation is subject to the Value-Added Tax (VAT). It is represented that Unisys Public Sector Services Corporation (UPSS), a domestic corporation, with office address at S & L Building, Esteban cor. De la Rosa Streets, Legaspi Village, Makati City, is primarily engaged in the business of licensing, marketing and modifying computer hardware, computer system software programs, applications, components, devices and supplies, as well as support, training, and consultancy services in the use and application of these products; that on June 29, 1994, it entered into a contract for the supply of goods and services for the Philippine Tax Computerization Project of the Bureau of Customs (BOC); that the contract provides that UPSS will sell goods and services to BOC at an agreed contract price; that specifically, the sale of "goods" as defined in the Conditions of Contract includes "all of the computer hardware, including installation/commissioning, operating and application software, other equipment, documentation software and/or other materials which the Supplier is required to supply to the Bureau under the contract;" that on the other hand, supply of "services" includes "the provision of technical assistance, computer hardware maintenance, software maintenance, training and other such obligations of the Supplier covered under the contract;" that Clause 8.6 of the Special Conditions of Contract requires that "payment of the Supplier's invoices in Pesos covering the local goods and services shall be made by the Bureau or by the IBRD on behalf and on the instruction of the Bureau directly to the Supplier. Indirect taxes and import duties levied on goods and services , but not penalties , will be paid by BOC to UPSS against proof of payment . Chargeable consumable items and other running costs will be reimbursed against proof of payment. Such reimbursement will be made within forty (40) days after submission of valid claims." That Clause 7 of the Conditions of Contract provides that "7. Import Duties, Taxes, Fees and Expenses Payable in the Philippines "7.1 The Supplier shall be responsible for all import duties , taxes , fees and other expenses payable in the Philippines in supplying the goods and services under this contract . The Supplier is responsible for other expenses such as clearance from docks and inland transport. "7.2 For goods and services, import duties and taxes must be itemized on invoices presented to the Bureau" that further, Clause 5.5 of the Special Conditions of Contract Services Conditions, provides that "5.5 The Supplier shall procure all permits and licenses, pay all charges , customs duties , stamp duties , fees , taxes and duties , and submit all applications necessary for and incidental to the due and lawful prosecution of the Services under the Contract. The Supplier shall be subject to the deduction of corporate income tax, value added tax , municipal tax and other taxes as provided by the Philippine laws and shall cause his employees to pay income taxes on their salaries or other money derived as specified under the existing laws or laws enacted during the tenure of this Contract, and the Supplier shall be subject to the withholding of income taxes of the aforesaid persons and to all necessities as provided by law." LibLex that based on the foregoing, you are requesting for a confirmation of your opinion that the sale of goods and services by UPSS to BOC is subject to the 10% VAT, the said tax being an indirect tax which may be shifted to or passed on to the buyer, that is, the Bureau of Customs, in this instant case. In reply, please be informed that then Sec. 99 of the Tax Code, as amended [now Sec. 105 of the Tax Code of 1997], provides as follows: "SEC. 99. Persons liable . Any person, who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be liable to the value-added tax imposed in Secs. 100 to 102 of the Tax Code, as amended. " The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services . . . . "The phrase " in the course of trade or business " means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity . "xxx xxx xxx." the contract between UPSS and BOC for the sale of goods, such as computer hardware, computer system software programs, applications, components, devices and supplies; and the sale of services, such as providing support, training, and consultancy services in the use and application of the said products, are transactions subject to the 10% VAT which may be shifted or passed on to BOC, VAT being an indirect tax. Consequently, BOC, being a government agency is required to deduct and withhold the VAT due at the rate of three percent (3%) of the gross payments on the purchase of goods and six percent (6%) on the gross receipts for services rendered by UPSS, which shall be creditable against the VAT liability of UPSS pursuant to then Sec. 110(c) of the Tax Code, as amended [now Sec. 114(C) of the Tax Code of 1997]. (BIR Ruling No. 132-96 dated November 27, 1996; BIR Ruling No. 70-96 dated July 5, 1996) prcd Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group