BIR Ruling [UN-129-95]

March 31, 1995 BIR RULING [UN-129-95] Project Management Office Small Islands Agricultural Support Services Programme c/o Department of Agriculture Region VII, M. Velez St. Capitol, Cebu City Attention: Mr . Herman Z . Ongkiko Program Director and Ms . Jean-Marie Warnon Co-Programme Director Gentlemen : This refers to your letter dated November 25, 1994 stating that the Small Islands Agricultural Support Services Programme (SMISLE) is a government project funded out of a grant assistance from the Commission of the European Communities (CEC); that the SMISLE Programme being executed by the Department of Agriculture officially started operation on April 1, 1994 with administrative framework and implementing guidelines of the programme are governed by the provisions of the Framework Agreement between the Philippine Government and CEC; that one of the essential components of the administrative framework involves the procurement of local supplies, materials and services; that local suppliers are required to incorporate VAT in their sales invoices; that under the Framework Agreement, particularly Article 13 on Taxation and Customs, Section 1 thereof, stipulating that " Taxes customs and import duties shall not be financed by the ECC Grant."; and that Section 4 of Article 13 of the same stipulated, viz: cdtech 1. Natural and legal persons , including expatriate staff, from the EEC countries executing technical cooperation contracts financed out of the EEC Grant shall be exempted from business and income tax in the state of the RECIPIENT . (emphasis supplied) Based on the foregoing, you now request for a ruling that the local suppliers of goods and services be zero-rated or exempt from VAT on all its sales to the Programme. 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 had not been ratified, the aforesaid tax exemption provision is without force and effect. Moreover, Section 1 of Article 13 of the Framework Agreement is applicable only to taxes for which the Programme itself is directly liable, e.g., income tax on interest earnings from bank deposits, 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 the Programme. In view thereof, your request that the sale of goods or services to the Program be zero-rated or exempt from VAT cannot be granted for lack of legal basis. (BIR Ruling No. 101; 102/000-00/042-92, dated January 28, 1992) Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Rev. Executive Assistant Legal Service