Tax Exemption of Purchases of Vehicles, Equipment and Supplies Relating to the Phil.-Australia Local Sustainability Program

December 14, 2000 BIR RULING NO. 070-00 Sec. 106 (A) (2) (c) Hon. Ernie D. Clarete Provincial Governor Province of Misamis Occidental Capitol, Oroquieta City S i r : This refers to your letter dated November 17, 1999 requesting for issuance of a Certificate of Tax Exemption on your purchases of vehicles, equipments and supplies under the arrangement between the Government of the Republic of the Philippines and the Government of Australia relating to the Philippines-Australia Local Sustainability Programs (PALS). It is represented that PALS is a five-year assistance Project under the Australian Agency for International Development (AusAid); that the Project is intended to strengthen participatory planning processes and local management or resources (physical, human and financial) for the promotion of sustainable community livelihoods as described under the Memorandum of Subsidiary Arrangements Relating to the Philippine-Australia Local Sustainability Program (MSA-PALS) dated April 29, 1999 between the Governments of Australia and the Philippines; that the MSA-PALS is a subsidiary agreement made pursuant to the General Agreement on Development Cooperation (GADC) dated October 28, 1994 between the two (2) countries; that the GADC was ratified by the Philippine Senate on January 22, 1996; that pursuant to Article 7 of the GADC-AUS-RP, " in respect of project supplies and professional and technical material and services whether to be imported from outside or procured within the Philippines, the Government of the Republic of the Philippines shall, for direct supplies and domestic goods and services, subject them to zero rate for purposes of Value Added Tax (VAT); exempt direct importation of goods from import duties, VAT and other taxes imposed in the Philippines (or pay such duties thereon) ; that under the said MSA-PALS, programs supplies and motor vehicles provided by the Government of Australia for the Program will be available for the unrestricted use of the Program and will not be withdrawn from such use without the consent of the Australian Executing Authority; that the Australian Team Leader will exercise administrative control over such supplies for the duration of the Program or such other time as mutually arranged by both Governments; that motor vehicles provided by the Government of Australia will be registered and insured jointly in the names of the Australian Embassy, representing AusAid and the Program, and will be under the administrative control of the Australian Team Leader for the duration of the Program; and that at the completion of the Program, all motor vehicles will be handed over to the Philippine Executing Authority in furtherance of the objectives of the Program. In reply, please be informed that pursuant to Section 109(q) of the 1997 Tax Code, transactions which are exempt under international agreements to which the Philippines is a signatory shall be exempt from VAT. It must be noted that the General Agreement on Development Cooperation between the Governments of Australia and the Philippines (GADC-AUS-RP) signed on October 28, 1994, is an international agreement duly ratified by the Philippine Senate pursuant to a Resolution adopted on January 22, 1996. Pursuant to the GADC-AUS-RP, in respect of project supplies and professional and technical material and services, whether to be imported from outside or procured within the Philippines, the Government of the Republic of the Philippines shall subject them to zero rate for purposes of Value Added Tax (VAT) . Likewise, the Philippine Government shall exempt PALS' direct importation of goods from VAT and other taxes imposed in the Philippines . On the other hand, the Memorandum of Subsidiary Agreement expresses the foregoing understandings of the two (2) governments concerning their respective responsibilities and contributions with respect to the Philippine-Australia Sustainability Program (MSA-PALS). Such that under the said MSA-PALS program supplies and motor vehicles provided by the Government of Australia for the Program will be available for the unrestricted use of the Program and will not be withdrawn from such use without the consent of the Australian Executing Authority. Furthermore, the Australian Team Leader will exercise administrative control over such supplies for the duration of the Program or such other time as mutually arranged by both Governments. Likewise, the motor vehicles provided by the Government of Australia will be registered and insured jointly in the names of the Australian Embassy, representing AusAid and the Program, and will be under the administrative control of the Australian Team Leader for the duration of the Program. Considering that all program supplies procured and motor vehicles acquired using the Fund (AusAid) shall be registered under the names of the Australian Embassy and the PALS, and which likewise shall be under the administrative control of the Australian Team Leader as provided for under the GADC, the same shall be exempt from Philippine taxes. Apparently, the Australian Government, i.e., the AusAid shall continue to have control over the use of funds and the property acquired under the Program. The Philippine Government is merely a beneficiary of the Aid. Such being the case, the principle of international comity shall apply and therefore, limits the authority of a government, i.e., the Philippine Government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities undertaken, in that capacity. (Art. II, Sec. 2, 1987 Philippine Constitution) caAICE Considering that the AusAid itself is exempt from taxation not only under the aforementioned GADC but also pursuant to the principle of international comity, the sale of program supplies, equipments and vehicles to the Executing Authority for the implementation of the PALS shall effectively be subject to a zero percent (0%) VAT. (BIR Ruling No. 111-97 dated October 23, 1997). It is understood, however, that subject supplier of goods and services to AusAid should apply for effective zero-rating, otherwise subject sale of vehicle, equipment and supplies shall only be considered exempt from VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue