DA ITAD BIR Ruling No. 048-06

May 4, 2006 DA ITAD BIR RULING NO. 048-06 Section 109, Tax Code of 1997; BIR Ruling No. DA-ITAD-013-03; BIR Ruling No. DA-ITAD-107-05 Trade Related Technical Assistance Programme 5th Floor NEDA Sa Pasig 12 St. Escriva St., Pasig City Attention: Mr. Roberto B. Quintos Programme Director Gentlemen : This refers to your letter dated October 19, 2005 requesting a ruling on whether the Trade Related Technical Assistance Programme (TRTAP) funded by the European Commission (EC) is exempt from the payment of Philippine taxes such as value-added tax (VAT). Documents submitted show that the EC, represented by the Commission of the European Communities, and the Republic of the Philippines, as the beneficiary, entered into a Financing Agreement (Agreement) for the funding of the TRTAP; that under the Agreement, the TRTAP aims to assist the Philippine authorities in enhancing conditions for international trade and investment and improve the access of Philippine exports to the European Union market; that TRTAP will provide assistance to agencies to enable compliance with the EU product standards and sanitary and phytosanitary requirements, promote trade facilitation and customs reform, and build local capacity to address difficulties in understanding, implementing and enforcing WTO Agreements; that the total cost of the funding is estimated at 3,920,000 euro; that the EC undertakes to finance a maximum of 3,500,000 euro while the beneficiary shall contribute the remaining 420,000 euro to the TRTAP; that under the Agreement, the EC will be funding, among others, the procurement of hardware and software, laboratory equipment as well as technical assistance activities for the Department of Trade and Industry (DTI), Department of Agriculture (DA) and the Bureau of Customs (BOC); and that the National Economic and Development Authority (NEDA) is the Executing Authority of the TRTAP and will coordinate and implement the TRTAP together with the DTI, DA and BOC. In reply, please be informed that Title IV, Article 11 of the Agreement provides as follows: "Article 11 Tax and Customs Provisions 11.1 Save where otherwise provided in the Special Conditions, taxes, duties or other charges (including value added tax- VAT- or equivalent taxes) shall be excluded from Community financing . (Emphasis supplied) 11.2 The State of the Beneficiary shall apply to procurement contracts and grants financed by the Community the most favoured tax and customs arrangements applied to States or international development organisations with which it has relations. 11.3 Where the Framework Agreement or exchange of letters applicable includes more detailed provisions on this subject, they shall apply as well." Based on the above-quoted provision of the Agreement, the exclusion of taxes from community financing means that no part of the fund can be used for the payment of Philippine taxes, customs duties, or any other charges. Accordingly, in the purchase of goods and services for the implementation of the TRTAP, the tax portion of the amount purchased shall neither accrue nor be chargeable to the subject fund. (BIR Ruling No. DA-ITAD-107-05 dated September 21, 2005) CSEHIa Be that as it may, the above provision does not, however, grant exemption or render the TRTAP itself or its implementation exempt from Philippines taxes, more particularly from VAT. In other words, said provision neither exempts the seller nor the buyer of the goods or services from taxation using the subject funds. It is well settled that taxation is the rule and tax exemption being the exception and is construed strictissimi juris against the taxpayer claiming tax exemption. In the absence of clear and convincing words of the law granting tax exemption too plain to be mistaken, a taxable transaction will remain subject to Philippine taxes. Moreover, since VAT is an indirect tax, the seller may pass on the VAT to the Philippine buyer in the purchase of goods or services. Inasmuch as no part of the fund can be utilized for the payment of taxes, the buyer shall be personally liable for the payment of VAT. (BIR Ruling No. DA-ITAD-013-03 dated January 27, 2003) Such being the case, this Office is of the opinion and so holds that since no part of the fund for the TRTAP can be used for payment of Philippine taxes, customs duties, or any other charges, transactions pursuant to the TRTAP remain subject to VAT imposed on the purchase of goods and services. However, in case the seller opts to pass on the VAT to the buyer, the VAT component shall be borne by the buyer recipient which may either be NEDA, DA, BOC or DTI, as the case may be. This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. aCSTDc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service