DA ITAD BIR Ruling No. 046-07

April 11, 2007 DA ITAD BIR RULING NO. 046-07 Host Agreement between the Republic of the Philippines and the World Health Organization Rajah Travel Corporation World Health Organization in-plant Office WHO Building, United Nations corner Taft Avenue Manila, Philippines Attention: Ms. Badette Javier Manager Gentlemen : This refers to your letter dated March 22, 2007 inquiring on the qualification of World Health Organization (WHO) to avail of zero percent value-added tax (VAT) on the purchase of Philippine Airlines (PAL) and Cebu Pacific domestic services. DcITaC In reply, please be informed that Section 12, Article IV of the Host Agreement Between the Republic of the Philippines and the World Health Organization dated September 29, 1952 (Host Agreement) provides, viz: "Article IV PROPERTY, FUNDS AND ASSETS xxx xxx xxx Section 12 While the Organization will not, as a general rule, in the case of minor purchases, claim exemption from excise duties and from taxes on the movable and immovable property which form part of the price to be paid, nevertheless, when the Organization is making important purchases for official use of property on which such duties and taxes have been charged or chargeable, the Government of the Republic of the Philippines shall make appropriate administrative arrangements for the remission or return of the amount of duty or tax. xxx xxx xxx This Bureau has taken the position that the aforecited provision on the imposition of taxes on the important purchases for WHO's official use shall mean that, in lieu of the provision on the remission or refund of amount of tax due, a tax exemption privilege can be granted. (VAT Ruling No. 143-90 revoking VAT Ruling No. 176-89) Such being the case, the local purchases by WHO are exempt from VAT (and not subject to VAT at zero percent) pursuant to Section 109 (K) 1 of the National Internal Revenue Code (Tax Code) of 1997, as amended by Republic Act No. 9337. 2 However, a closer examination of the Host Agreement provides that the exemption accorded to WHO on its important purchases refers to property for its official use. Property, in the legal context, is defined as anything which is or may be the object of appropriation. 3 It may either be immovable and/or real property or movable and/or personal property. 4 The following are immovable property: (1) Land, buildings, roads and constructions of all kinds adhered to the soil; (2) Trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable; (3) Everything attached to an immovable in a fixed manner in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object; (4) Statues, reliefs, paintings or other objects for use or ornamentation, places in buildings or lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements; (5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works; (6) Animal houses, pigeon houses, beehives, fish ponds or breeding places of similar nature, in case their owner has placed them or preserves them with the intention to have them permanently attached to the land and forming a permanent part of it; the animals attached in these places are included; (7) Fertilizer actually used on a piece of land; (8) Mines, quarries and slag dumps, while the matter thereof forms part of the bed and waters either running or stagnant; (9) Docks and structures which, though floating are intended by their nature and object to remain at a fixed place on the river, lake, or coast; (10) Contracts for public works, and servitudes and other real rights over immovable property. 5 On the other hand, the following things are deemed to be personal property : (1) Those movables susceptible of appropriation which are not included in Article 415; (2) Real property which by any special provision of law is considered as personalty; (3) Forces of nature which are brought under control by science; (4) In general, all things which can be transferred from place to place without impairment of the real property to which they are fixed. 6 The following are also considered personal property : (1) Obligations and actions which have for their object movables or demandable sums; and (2) Shares of stock of agricultural, commercial and industrial entities, although they may have real estate. 7 The tests to determine whether an object is movable or not are : (1) Whether the object can be transported from place to place; (2) Whether the change of location can take place without injury to the immovable to which it may be attached; and (3) Whether it is not included in the enumeration found in Article 415 of the Civil Code. If the answer to all the above questions is in the affirmative, then the object is movable. Applying the above definitions and discussions on property, it is clear that the subject transaction between WHO and the airline companies PAL and Cebu Pacific cannot be considered purchase of property. Moreover, it is worthy to note that the subject transaction involves a contract of carriage of passengers whereby PAL and Cebu Pacific bind themselves to transport the passengers who availed of the services from place of origin to place of destination and such is usually evidenced by an airline ticket. Such undertaking is clearly a purchase of service and not a purchase of property (immovable/real or movable/personal). TAaIDH Such being the case, this Office is of the opinion and so holds that the purchase of domestic services by WHO from PAL and Cebu Pacific, not being a purchase of property, is not exempt from VAT. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue Footnotes 1. SEC. 109. Exempt Transactions . The following shall be exempt from the value-added tax: xxx xxx xxx (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529; 2. An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 288 of the National Internal Revenue Code of 1997, As Amended, And For Other Purposes. 3. Article 414, Civil Code of the Philippines. 4. Ibid. 5. Article 415, Ibid. 6. Article 416, Ibid. 7. Article 417, Ibid.