DA ITAD BIR Ruling No. 094-09

September 24, 2009 DA ITAD BIR RULING NO. 094-09 Sec. 106, NIRC of 1997, as amended; Articles 5 & 7, General Agreement on Development Cooperation between the Government of Australia and the Government of the Republic of the Philippines; BIR Ruling No. DA-ITAD-039-09 & 042-09 Provincial Road Management Facility (PRMF) 3rd Floor JMT Building, ADB Avenue Ortigas Center, Pasig City Attention: Mr. David Goodwins Country Manager-Philippines Gentlemen : This has reference to your letter dated 17 August 2009, requesting for the issuance of a Value-Added Tax (VAT) exemption ruling for the Philippines-Australia Provincial Road Management Facility (PRMF), a bilateral program funded by the Australian Agency for International Development (AusAID). It is represented that the Government of the Republic of the Philippines (hereinafter referred to as "GRP") and the Government of Australia (hereinafter referred to as "GOA") entered into a General Agreement on Development Cooperation between the Government of Australia and the Government of the Republic of the Philippines (hereinafter "GADC") which entered into force on 12 March 1998; that a Subsidiary Arrangement was thereafter entered into by GRP and GOA on 28 October 1994 for the creation and implementation of the PRMF; that the over-all goal of the five-year Facility (2005-2010) is "to increase economic growth and improve access to public infrastructure and services in the southern Philippines"; and that the project will provide grant assistance directly to, or in support of, selected Provincial Governments; that the objective is to improve the sustainable GOP provision, management and maintenance of a core network of provincial roads in targeted provinces in Mindanao and the Visayas. Its components includes: (1) Capacity Building for Road Sector Planning and Management aimed at providing provinces to have institutional, financial, operation, planning and management capacity to develop and implement road sector plans in support of broad-based sustainable social and economic development; and (2) Road Network Rehabilitation and Maintenance with targeted outcome of provincial roads being rehabilitated and sustainably maintained on an annual basis. It is further represented that the PRMF is being implemented by Coffey International Development Pty. Ltd., the Australian Facility Managing Contractor (FMC), in collaboration with the Department of the Interior and Local Government (DILG); and that the total project cost is expected to be up to AS100 million over five years. CcTHaD In reply, please be informed that Section 106 (A) (2) (c) of the National Internal Revenue Code of 1997, as amended (NIRC of 1997) provides, viz. : "Section 106. Value-added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve-percent (12%), . . . xxx xxx xxx" (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate." In this connection, paragraphs 1 and 2 of Article 5 of the GADC between the GOA and the GRP, signed on 28 October 1994 and which entered into force on 12 March 1998, provides, viz. : "Article 5 Subsidiary arrangements 1. In support of the objectives of this Agreement, the Government of Australia and the Government of the Republic of the Philippines, or their agencies, statutory authorities or organizations may conclude subsidiary arrangements in respect of specific activities. 2. Subsidiary arrangements shall make specific reference to this Agreement and the terms of this Agreement shall, unless otherwise stated, apply to such subsidiary arrangements. Wherever possible, such subsidiary arrangements shall set out: TSaEcH (a) the name and duration of the activity; (b) a description of the activity and statement of its objectives; (c) the nominated implementing agencies in both countries; (d) potential benefits of the activity; (e) details of the contributions to the activity by the two Governments and other donors including: (i) financial contributions; (ii) materials, services and equipment to be supplied; (iii) the numbers and areas of expertise of Australian, Filipino and other personnel to be engaged; and (iv) estimated annual budgets; (f) arrangements for management and control, including those for reporting; (g) timetable for implementation; and (h) procedures for evaluation and review. xxx xxx xxx" Furthermore, paragraph 1 (a) Article 7 of the said GADC pertinently provides, viz. : EDaHAT "Article 7 Project supplies and professional and technical material and services 1. 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: (a) for direct supplies of 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); and be responsible for inspection fees, storage charges and all other levies, fees and charges;" xxx xxx xxx 3. The disposal of vehicle provided for activities executed under the Agreement shall be the subject of discussions between the two Governments and shall take into account the transport requirements of other activities assisted by the Government of Australia under the Program of development cooperation." Based on the above-quoted provisions, the terms of the GADC, unless otherwise stated, shall apply to subsidiary arrangements making specific reference to said Agreement. Moreover, Articles 7 (1) (a) and (3) of the GADC state that the GRP shall subject to zero rate, for purposes of VAT, direct supplies of domestic goods and services in respect of project supplies and professional and technical material and services including vehicles. Furthermore, GRP shall exempt direct importation of goods from import duties, VAT and other taxes imposed in the Philippines. It is worthy to note that the abovementioned PRMF was created by virtue of a Subsidiary Arrangement between the Government of the Republic of the Philippines and the Government of Australia concluded on 27 March 2009 pursuant to the aforequoted Article 5 of the GADC. Such being the case, this Office is of the opinion and so holds that since PRMF was created by virtue of a subsidiary arrangement concluded pursuant to the provisions of the GADC, an international agreement to which the Philippines is a signatory, then direct supplies of domestic goods and services to PRMF are subject to VAT at zero percent rate while direct importations of goods are exempt from import duties, VAT and other taxes imposed by Philippine tax authorities. (BIR Ruling No. ITAD-103-05 dated September 19, 2005) CEaDAc In view of the foregoing, this Office hereby confirms that all program supplies, professional and technical materials and services provided for or procured for the implementation of the activities under the PRMF, are subject to VAT at zero percent rate, while direct importation of goods are exempt from import duties, VAT and other taxes pursuant to Section 106 (A) (2) (c) of the NIRC of 1997 in relation to Article 7 of the GADC. This ruling is issued on the basis of facts 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 party is concerned. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service